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Monetary Policy – Stimulus or Back to IMF Basics

by Asad Rizvi

November 24, 2020 (MLN): It is still not clear that the market witnessed 625 basis points policy rate cut after the PANDEMIC attack is enough or not to boost the economy ?  Today in Its monetary policy statement (MPS) announcement, SBP maintained its policy rate to 7% that had dropped down from 13.25%.

After the announcement, I had the opportunity to attend SBP Governor's – Post Monetary Policy Statement virtual meeting along with 4 or 5 SBP-representatives.

The impression that I got after viewing the 15-minutes chart presentation is that the growth prospect looks bright. Overall SBP's approach towards the economy did not look worrisome. The focus of MPS/Charts remained on small size recovery.

SBP after providing stimulus due to pandemic is appearing comfortable with the current pace of growth and the inflation outlook. Inflation that had surged in earlier months due to sharp increase in food prices is tapering off due to easing of supply side pressure and administrative measures.

It is true that the housing and construction sector is playing a vital role in building up the growth momentum. Bounce back in Large Scale Manufacturing (LSM) is also because of healthy offshore demand for the Pakistani textile products. Increase in petroleum sale is a hint of increased economic activity. 

The Central Bank has shown cautious optimism because of improved business sentiment, as they still see risk to the outlook due to sharp surge in Coved cases. 


Some of the external and domestic challenges cannot be overlooked/ignored that could still pose real challenges to the economy.

Global economic condition is not perky, the recovery is dwindling, which could hurt us too, if our trading partners decide to slow down or disengage its business activity with Pakistan for no fault of ours.

Based on evidence, so far the going is good, but signs of recurrence or surging of Covid-19 is a very worrying sign. On the back of lack of further fiscal and monetary support, the acceleration of pandemic could start hurting the economy. The risk is that if proactive measures are not taken to speed up the growth, the economic recovery could be short lived.

In my view, the crux of the meeting was optimism shown by the SBP Governor's statement that the market will soon hear the positive news about the IMF. He was surely referring to discussion and approval of $ 450 million tranche that has been delayed. Though he showed his reservations referring to the hike in power sector rates and tax related matters that could spoil all the hard work. He said, the authorities do not want to take the risk knowing that both the targets are difficult to attain unless coronavirus fades.

If we take a look at the REER data, the SBP Net Reserve Position, which is at a 30-months high, and the demand/supply factor, then recent weakness of Rupee of nearly 2% in 6 working days does not go well along with the fundamentals. SBP has to ensure exchange rate stability, as market players have started believing that weakening of Rupee is triggered prior to the talks with IMF.

Though MPC in its statement viewed the financial condition appropriately accommodative, suggesting that in near term, there is no possibility of hike in Repo and Reverse Repo rates, but the risk is that more weakening of Rupee against US Dollar will further push tenor rates higher fearing IMF conditional talks, as fixed income traders have already positioned themselves for hike in SBP policy rates.

Sharp surge in government paper yield is because of the narrow corridor rate. The purpose of SBP standing facility of Floor and Ceiling of the interest rate corridor is to strengthen the transmission of monetary policy to acquire desired results on term structure on interest rate, which can be attained by widening the width of interest rate corridor.

However, lastly my biggest concern is that in the past we saw sizable cancellation of export orders due to PANDEMIC that caused huge suffering to the customer/nation.

The occurrence of PANDEMIC is once again visible and this time it is spreading fast across the globe, which is a very alarming sign.

The expectation was that MPS will address this serious issue and provide guidance/share about the strategy to handle the situation, if it reoccurs. Hopefully banks have been guided to insert certain protective clauses in export documents to safeguard its customers from losses, if the orders are cancelled.

What other measures have been taken/suggested this time to minimize the damage? Do we have a contingency plan if customers’ orders are cancelled?


(The writer is former Country Treasurer of Chase Manhattan Bank)


Disclaimer: The opinions in this article are the author’s and do not necessarily represent the views of Mettis Link News (MLN)


Copyright Mettis Link News

Posted on: 2020-11-24T09:10:00+05:00


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