The government is foolhardily pursuing the policy of drawing hot money into short-term treasury bills and bond market to jack up foreign currency reserves, in line with International Monetary Fund (IMF) envisaged targets, a strategy that has an array of inherent risks.
Many independent economists call it an Egyptian model because the incumbent Governor State Bank of Pakistan Dr Reza Baqir in his last assignment as IMF Resident Chief in Egypt had opted for the same model to raise their foreign currency reserves in short span of time under the fund programme.
It’s a dangerous path owing to a variety of reasons. First of all the government and its Prime Minister Imran Khan should remember that the ruling Pakistan Tehreek-e-Insaf (PTI) had taken a tough exception to the last regime’s raising $2 billion through international capital market at a markup rate of over 8 percent.
Then, the PTI had accused the Pakistan Muslim League-Nawaz (PML-N) government of borrowing at an exorbitant markup rate. Even for launching the Sukuk bond, it was propagated the then government had sold out Motorway-1 as the Islamic bond could not be launched without a collateral. Now, what the PTI is doing is beyond any economic rationale.
The IMF seems happy with this pursuit for hot money as different international fund houses, in the name of hedging and other instruments, jump on openings to generate cheap funds at 1-2 percent markup rate. They are always exploring opportunities to invest in developing countries having offered rates in double digit to invest for short-term. They continue investing in such countries until the interest rates are reduced.
Everyone is happy with this flawed policy except for the people of Pakistan, because the higher interest rate is undermining economic activities as the growth momentum has almost ground to a halt amid record 16-17 percent food inflation. The IMF is relaxed because the State Bank of Pakistan (SBP) will be able to raise foreign currency reserves levels, thus becoming able to meet Net International Reserves (NIR) target under the IMF-sponsored program.
Pakistan had so far raised $1.2 billion in the shape of hot money from abroad and some estimates suggest it might go up to $3 billion till end of the current fiscal year. It is also a conflict of interest because the SBP will be reluctant to ease the policy rate knowing very well it may also lead to a reduction in the interest of foreign institutions to invest into treasury bills and bond market on short-term basis.
The Advisor to Prime Minister on Finance and Revenues Dr Abdul Hafeez Shaikh was of the view the government took all safeguard measures before allowing foreign institutions to invest into short-term treasury bills and bond market.
Instead of singing economic team’s praises over the achievements on economic front every week, there is a need to analyse the ground realities objectively as people of Pakistan are being ground between the millstones of a severe slowdown and a runaway inflation
On other hand, the SBP had kept its policy rate unchanged in its last monetary policy in anticipation of higher inflationary pressures. The Consumer Price Index- (CPI) based inflation had gone up to 12.67 percent, but it increased mainly because of a surge in food and utility prices. How the discount rate relates to bringing down prices of tomatoes, potatoes, chicken, flour, and other food items as it is beyond comprehension of even economists of this country.
The food inflation will further mount the overall inflation in the ongoing month (December 2019) and it might cross 13-percent-mark but there is no justification to keep discount rate at the existing rate because this rising trend has nothing to do with the policy rate.
If the discount rate was kept on higher side then the gross domestic product (GDP) growth prospects will further diminish as Moody’s had already lowered the growth projection from IMF’s estimates of 2.4 percent to 2.2 percent for the current fiscal year.
Pakistan has committed under the IMF programme the SBP will maintain an appropriately tight monetary policy to guide inflation and inflation expectations. To this end, it will maintain a positive policy rate in real terms, consistent with the SBP’s medium-term inflation objective and the programme’s monetary aggregate targets. Until the SBP has advanced its preparations toward an inflation targeting framework, Net Domestic Assets (NDA) and NIR targets will guide money supply to rates consistent with the inflation target of 5–7 percent. In addition, the NIR targets will guide the accumulation of reserves under the programme.
To support the new monetary policy framework under the IMF-guided framework, the SBP’s financing of budget deficit will be eliminated. The direct SBP financing of the budget had gone up from around Rs3.6 trillion in FY2018 to over Rs7.7 trillion (around 20 percent of the GDP) at the time of signing of loan agreement with IMF programme but it came down to a nought with the start of the current fiscal year. This fiscal dominance had compromised the SBP’s operational independence, jeopardising the achievement of the inflation objective. The Pakistani authorities were committed under the IMF programme to refrain from any new direct financing of the budget by the SBP (continuous performance criterion) and to gradually reduce the SBP stock of net government budgetary borrowing (performance criterion).
Moreover, the SBP and the ministry of finance have agreed to re-profile the stock of mostly short-term government debt held by the SBP into short- and long-term tradable instruments of various maturities (one, three, five, and ten years) at interest rates close to market levels. This operation will take place before the adoption of the amended SBP Act till end December 2019 and will support debt sustainability, reduce the government’s interest bill, and avoid crowding out of private credit.
Instead of singing economic team’s praises over the achievements on economic front every week, there is a need to analyse the ground realities objectively as people are being ground between the millstones of a severe slowdown and a runaway inflation.
So the policy of suffocating the economy under the aegis of IMF should be abandoned immediately and efforts should be made to spur growth and check inflation with improved administrative controls.
The writer is a staff member