22:06
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KARACHI: The State Bank of Pakistan (SBP) is likely to face difficulties in taking monetary policy decision as the government wants to bring down the interest rate to a single-digit and the International Monetary Fund (IMF) calls for tight monetary policy, said experts.
The central bank is due to announce the monetary policy statement for the months of December and January this month.
The experts said, on the one hand, the government is eager to lower inflation and bring down the interest rate to a single-digit to gain sympathies of the people in the next general elections, and, on the other, the International Monetary Fund wants tight monetary policy.
“Underlying inflation remains high and the ultimate goal of the State Bank should be to significantly bring down inflation by using its policy tools. Reduced recourse to the central bank financing by the government is also critical for a durable reduction in inflation.”
Though, inflation numbers for November will be announced early this week, it is expected that the State Bank will slash the discount rate by 50 basis points on the basis of a continuous decline in inflation and fall in the treasury bills yields during the last few months.
Rising government borrowing from the banking system and depreciation in the exchange rate may cap this assumption, said experts and forecast the inflation rate for November to be around seven percent.
Headline consumer price index declined to 7.7 percent on year-on-year basis in October; however, the core inflation was reported at 9.7 percent during the same month.
The IMF said: “Headline inflation has decelerated recently but is likely to return to the double digits by the end of 2012-13.”
A senior economist said: “A modest deceleration in the inflation rate allowed the central bank ease the monetary policy and cut the discount rate by cumulative 200 basis points to 10 percent since August to foster investment growth but the scope for further easing appears limited.”
“The central bank’s policy of lowering interest rates only appeases the government. It never spurs economic growth, rather it reduces the cost of government borrowing,” said a senior banker. Owing to the election year, a lot of investment will be done, he said.
“Every year, the government requires a hefty amount of Rs1.6 trillion to finance the budget deficit. Given lower development assistance from the United States and other multilateral lenders, the deficit financing has shifted away from external sources towards domestic bank financing,” said another banker.
Government borrows below-than-required amount from the National Savings Scheme, so the only financing options left for the government is printing currency notes from the State Bank.
The central bank lowers interest rates and then does frequent injections in the banking system and the banks due to lower deposits’ growth borrowed money from the financial institutions, especially the money market, said the banker.
Government borrowed Rs656 billion from the banks and the SBP is continuously providing liquidity to the banks through open market operations, he said.
In case of stable interest rate, the profitability and dividend of the State Bank may increase and shift to the government, he said.
When asked will the State Bank continue to ease the monetary policy for obtaining a fresh loan programme from the IMF, the banker said, if the government reenters another IMF programme, then the fund authorities would have no issue with the single-digit discount rate.
Meanwhile, the Executive Board of the International Monetary Fund concluded the first post-programme monitoring discussions and the ex-post evaluation of exceptional access under the 2008 standby arrangement with Pakistan.
“The monetary policy has accommodated large fiscal deficits. The SBP’s direct lending to the government and provision of liquidity to facilitate bank purchases of government securities has accommodated higher deficits at the cost of higher inflation and currency depreciation.”
“The SBP takes some factors into consideration in its monetary policy decision. But there are likely to be some concerns of the central board of directors of the SBP, while announcing the next monetary policy, said Sayem Ali a senior economist at Standard Chartered Bank.
In its last monetary policy the central bank reduced the discount rate on the expectations of external dollar inflows, which have not been materialised so far, he said, adding that further rupee depreciation is also a concern for the central bank.
“I think the SBP will look at the next six-month macroeconomic outlook, while taking its decision. Given the domestic and external shocks, the SBP is likely to follow wait and see policy and keep the discount rate on hold for December,” said Ali.
According to another economist, high government borrowing and deficit monetisation is adding to inflation pressures. The fiscal picture looks equally bleak.
The estimated budget deficit target of 4.7 percent for FY13 is likely to see slippages due to optimistic revenue assumptions and an expenditure overshoot. Given the paucity in external financing, higher deficits are increasingly being financed through monetisation, fuelling inflationary risks and crowding out private sector growth, said economist.
The share of the banks increased to 3.4 percent of GDP in FY12 from less than one percent in FY05. In 2012, the government borrowed Rs700 billion from the banking system against the budgeted Rs300 billion.
The central bank is due to announce the monetary policy statement for the months of December and January this month.
The experts said, on the one hand, the government is eager to lower inflation and bring down the interest rate to a single-digit to gain sympathies of the people in the next general elections, and, on the other, the International Monetary Fund wants tight monetary policy.
“Underlying inflation remains high and the ultimate goal of the State Bank should be to significantly bring down inflation by using its policy tools. Reduced recourse to the central bank financing by the government is also critical for a durable reduction in inflation.”
Though, inflation numbers for November will be announced early this week, it is expected that the State Bank will slash the discount rate by 50 basis points on the basis of a continuous decline in inflation and fall in the treasury bills yields during the last few months.
Rising government borrowing from the banking system and depreciation in the exchange rate may cap this assumption, said experts and forecast the inflation rate for November to be around seven percent.
Headline consumer price index declined to 7.7 percent on year-on-year basis in October; however, the core inflation was reported at 9.7 percent during the same month.
The IMF said: “Headline inflation has decelerated recently but is likely to return to the double digits by the end of 2012-13.”
A senior economist said: “A modest deceleration in the inflation rate allowed the central bank ease the monetary policy and cut the discount rate by cumulative 200 basis points to 10 percent since August to foster investment growth but the scope for further easing appears limited.”
“The central bank’s policy of lowering interest rates only appeases the government. It never spurs economic growth, rather it reduces the cost of government borrowing,” said a senior banker. Owing to the election year, a lot of investment will be done, he said.
“Every year, the government requires a hefty amount of Rs1.6 trillion to finance the budget deficit. Given lower development assistance from the United States and other multilateral lenders, the deficit financing has shifted away from external sources towards domestic bank financing,” said another banker.
Government borrows below-than-required amount from the National Savings Scheme, so the only financing options left for the government is printing currency notes from the State Bank.
The central bank lowers interest rates and then does frequent injections in the banking system and the banks due to lower deposits’ growth borrowed money from the financial institutions, especially the money market, said the banker.
Government borrowed Rs656 billion from the banks and the SBP is continuously providing liquidity to the banks through open market operations, he said.
In case of stable interest rate, the profitability and dividend of the State Bank may increase and shift to the government, he said.
When asked will the State Bank continue to ease the monetary policy for obtaining a fresh loan programme from the IMF, the banker said, if the government reenters another IMF programme, then the fund authorities would have no issue with the single-digit discount rate.
Meanwhile, the Executive Board of the International Monetary Fund concluded the first post-programme monitoring discussions and the ex-post evaluation of exceptional access under the 2008 standby arrangement with Pakistan.
“The monetary policy has accommodated large fiscal deficits. The SBP’s direct lending to the government and provision of liquidity to facilitate bank purchases of government securities has accommodated higher deficits at the cost of higher inflation and currency depreciation.”
“The SBP takes some factors into consideration in its monetary policy decision. But there are likely to be some concerns of the central board of directors of the SBP, while announcing the next monetary policy, said Sayem Ali a senior economist at Standard Chartered Bank.
In its last monetary policy the central bank reduced the discount rate on the expectations of external dollar inflows, which have not been materialised so far, he said, adding that further rupee depreciation is also a concern for the central bank.
“I think the SBP will look at the next six-month macroeconomic outlook, while taking its decision. Given the domestic and external shocks, the SBP is likely to follow wait and see policy and keep the discount rate on hold for December,” said Ali.
According to another economist, high government borrowing and deficit monetisation is adding to inflation pressures. The fiscal picture looks equally bleak.
The estimated budget deficit target of 4.7 percent for FY13 is likely to see slippages due to optimistic revenue assumptions and an expenditure overshoot. Given the paucity in external financing, higher deficits are increasingly being financed through monetisation, fuelling inflationary risks and crowding out private sector growth, said economist.
The share of the banks increased to 3.4 percent of GDP in FY12 from less than one percent in FY05. In 2012, the government borrowed Rs700 billion from the banking system against the budgeted Rs300 billion.
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