A glimmer of hope which was revealed during the announcement of monetary policy, where optimism was raised that interest rate might register a halt for a longer period, fizzled out within 24 hours when the Finance Minister announced that petroleum product prices, especially diesel, the main driver to run the commodities rose sharply which would certainly entice the inflation rate to beyond 30 percent in the coming months, triggering a new flash of monetary policy tightening.
The interest rate has already been at a record high of 22 percent, and the inflation rate in May peaked at 38 percent which was also historically high hinting interest rate to go up. On June 26, the SBP held an emergent meeting and raised interest aimed at qualifying for the Standby Agreement with the IMF. The international funding agency at that time welcomed the step but cautioned the economic managers of the country that more has to be done to combat inflation.
The IMF in the country report said that the authorities have generally been sanguine about inflationary pressures quickly receding and returning to their 5–7 percent inflation target range by end-FY25.
Staff emphasized that the SBP will need to continue its tightening cycle to re-anchor expectations, given that inflationary pressures are expected to persist over the coming year because the impact of exchange rate corrections will continue to reverberate through the economy.
The SBP agreed to maintain a tight monetary policy stance—higher rates and prudent use of liquidity injections— as needed, given incoming data, to achieve real positive interest rates, on a forward-looking basis, and place inflation and inflation expectations on a clear downward path. At the same time, improving the monetary transmission and the monetary operation framework will be important.
While announcing the monetary policy where the interest rate remained unchanged, the Governor State Bank of Pakistan Jameel Ahmed narrated the same view that by the second half of the fiscal year 2024-25, the inflation rate would probably recede in the range of 5 to 7 percent while in the current fiscal year the rate would be between 20-22% which appeared to be a herculean task, because numbers are showing different only base year change maneuver is helping trim the inflation. In the domestic markets, prices are showing different trends and within 24 hours the jump in the petroleum product price by almost 20 rupees a liter for both the products diesel and petrol would inflate the numbers.
Already the food inflation component has been on the higher side and the federal government and provincial governments through slogans and speeches, planned to reduce the price holding sermons that would not allow profiteers and shopkeepers to play with the common people.
Price of nearly every commodity used on a daily basis are historic high like sugar (Rs 150- Rs 160/kg), flour (Rs 160-Rs 180/kg) and rice Ts 400 to Rs 500/kg) while other product prices to are on the higher side like tea, cooking oil, pulses, spices, soaps, detergents, shampoos, dry milk, jams, butter and bread. Continuous rise in the products consumed on a daily basis have been on the rise on everyday basis which has been a cumbersome task for the salaried class and daily wagers to face the brunt, where monetary policy could not alone resolve the fiery issue of inflation. The Provincial governments have to come with the plan and trim the margin of profit in commodity trading. All the measures appeared to have failed to combat, earlier we are importing inflation because of Russia and Ukraine war which inflated the commodities prices globally. However, recently the prices globally have fallen but the impact in the local markets have been marginal in some cases while prices ate still on the higher side because of the dollar and rupee parity.
During the period of the current government, rupee value against one dollar accelerated from Rs 182 to Rs 298.93 till May 11, 2023, showing a depreciation of 39 percent. While currently the value of rupee against one dollar stands at Rs 287, showing a dip of 36.5 percent mainly because of the non-availability of dollars and the higher debt payments of multilateral agencies and bilateral countries. Heavy debt payments continued to rein in the current fiscal year which probably would be around $25 billion of this $11.5 billion would be rolled from this nearly $5.3 billion has already been rolled over.
The road ahead would be bumpy and tiresome and need stringent measures and it would be difficult under current circumstances which are likely to be prolonged to cut the interest rate. The higher interest rate has been suffocating the business community where industrial output has slowed down resulting in closure of various factors belonging to textile, auto, iron and steel, tiles and other products.
The slowing down of the industries could be easily gauged from the Large Scale manufacturing data where all the sectors have shown decline. Automobiles recorded a fall of 47.70%, cotton yarn 21.38%, sugar 15.26%, cement 12.36%, petroleum products 12.23% and steel 4.76%. This already impacted the overall economic growth where in FY23, the numbers belied the government figures of 0.3% where actual recording according to IMF growth showed a decline of 0.5%. These numbers are the second worst numbers in the last over two decades where during the COVID-19 period it showed a decline of 0.9%.
“Tight monetary policy, targeted subsidies along with improvement in supply of goods through stability in exchange rate and better governance would be crucial in bringing inflation on a downward trajectory”, Muhammad Awais Ashraf, Head of Research at Foundation Securities said.
“SBP decision to keep policy rate unchanged is in line with our expectation as we continue to believe this would keep real interest rates firmly in the positive territory on a forward-looking basis and help further anchor inflation expectation”, Awais said.
Faisal Shaji, Chief Strategy Officer, Standard Capital Securities said that the business cycle should be improved by bringing down interest rates.
“Government expenditure should be drastically curtailed to bridge the fiscal gap. All SOEs should run on private-public partnership with professional management. Must also institute Chinese into the management culture of SOEs”, he said. Many SOEs should be listed at the stock exchanges to bring efficiency into public services< said Faisal.
Amayed Ashfaq Tola, Advocate High Court, President – Tola Associates said that to manage and reduce inflation, and improve the business cycle, the following steps are necessary:
To ease the pressure on the PKR by ensuring imports are not excessively high and maintaining a decent level of foreign exchange reserves. If the PKR is stable and/or appreciates in value, this will reduce imported inflation.
Stability in PKR parity rate will bring stability to cost of goods exported, i.e raw materials, so exports can bounce back in the current fiscal year. Plus a stable PKR ensures that an exporter can calculate his costs and therefore his margin in a near-to-accurate manner”, Amayed said.
Lastly, consider reducing the interest rates, as this will reduce cost of businesses that are borrowing. This will automatically reduce the cost being passed on to the consumers.
Ali Nawaz, CEO of Chase Securities said that SBP made its monetary policy announcement, opting to maintain the interest rates at their current level. This decision indicates that there was no external pressure from the International Monetary Fund (IMF) to increase rates; however, the IMF did advise the SBP to carefully monitor the developments and impact of the external account situation and, if necessary, adjust the rates accordingly.
SBP officials also expressed their expectation that inflation would ease in the coming months. It is expected that the inflation will reduce from the second half of the fiscal year 2023-2024 due to the base effect coming into play. However, there is a cause for concern as recent fluctuations in oil prices could potentially alter the inflation outlook if there is a substantial upside in oil prices.
“It’s important to note that the current monetary policy stance has influenced demand, leading to an economic slowdown. This slowdown is expected to gradually reduce inflation over time. This move could have potential implications for the overall economic landscape, and the SBP will closely monitor the situation to ensure stability and sustainable growth”, said Al;.
Interest Rates are expected to decline from 4QFY24 onwards as the inflation eases and external account position improves.
