100bps cut in policy rate
EDITORIAL: On 5 May the Monetary Policy Committee (MPC) decided to reduce the discount rate by 100 basis points — to 11 percent — a decline that was, for a change, correctly forecast by a host of analysts. The reduction is, as per the statement, attributable to the decline in core inflation, non-food and non-energy, from 8.2 percent in March to 7.4 percent in April — a decline of 0.8 percent in a single month.
However, the MPC's rationale cannot be taken as a yardstick for future decisions, given that a decline of 0.4 percent in core inflation in March 2025 did not merit a reduction of even 25 basis points (February core inflation was 7.8 percent to 8.2 percent in March), which is the reason behind inaccurate forecasting by analysts. Be that as it may, consumer price index reached an enviable 0.3 percent in April compared to 0.7 percent in March, a decline that has been the source of much crowing by the Prime Minister and the Finance Minister, though 2 percent inflation is globally regarded as a desirable target as it keeps the wheels of industry well oiled.
There is, however, evidence that inflation data is being manipulated, a statistic that directly impacts on the performance of the economic team leaders. This is revealed by an obvious miscalculation by the Pakistan Bureau of Statistics in its calculation of the sensitive price index (SPI) for the week ending 30 April 2025: a decline in petroleum prices of negative 11.62 percent has been noted in the SPI though there was no reduction as per the Prime Minister who publicly stated that even though the international petroleum prices had declined yet the government had decided not to pass it onto the public by raising the petroleum levy to keep prices stable — money that would be diverted for Balochistan development.
The growth projection by the MPS has not been revised downward and remains at 2.5 to 3.5 percent irrespective of the fact that subsequent to the Trump tariffs as well as the escalating conflict in the Middle East, growth estimates have been downgraded globally. Reports also indicate that the staff-level agreement reached on the first review under the International Monetary Fund (IMF) programme was mainly due to the Fund staff's acknowledgement that the growth projection has to be revised downward. It is worth noting that the October 2024 document uploaded on the IMF website notes that 'important shortcomings remain in the source data available for sectors accounting for around a third of GDP while there are issues with the granularity and reliability of the Government Finance Statistics (GFS). The authorities are prioritising addressing these weaknesses, supported by Fund Technical Assistance on the GFS and a new PPI index.'
The decline in the discount rate has been a long-standing demand of the business community, mainly large-scale manufacturing sector (LSM), that routinely borrows working capital with the interest charged on the borrowing defined as an input cost. From 1 July 2023 to 12 April 2024 credit to the private sector was 106 billion rupees and rose to 692 billion rupees in the comparable period this year; however, LSM growth declined from negative 0.45 percent (July-February last year) to negative 1.9 percent in the comparable period this year. This has led economists to conclude that the rise in private sector credit has been diverted away from manufacturing and into the stock market. Thus, a decline from 22 percent discount rate effective end June 2024 to 12 percent did little to render LSM growth on a positive trajectory, and it is doubtful if another percentage decline would propel growth upward.
In addition, it is also relevant to note that Pakistan has one of the highest discount rates in the region (India 6 percent, Sri Lanka 8 percent, Bangladesh 10 percent), which explains why our products are uncompetitive.
The MPS lightly touches on two negative indicators, lightly because it then proceeds to give it a positive twist. First, a current account surplus sourced to a rise in remittances; however, the trade deficit in March was 2183 million dollars against 3388 million dollars in April or a deficit rise of 1205 million dollars.
And secondly, while acknowledging that net financial inflows (the capital account component of the balance of payments position) have remained weak though the more accurate definition would have been that net inflows have been negative yet the MPC bafflingly notes that 'on the back of the expected realisation of planned official inflows' that incidentally have yet to materialise, 'the MPC expects foreign exchange reserves to rise to 14 billion dollars.' It must be borne in mind that the man who chairs the MPC, the Governor State Bank of Pakistan, recently admitted that 16 billion dollars are planned as rollovers in the current fiscal year in which case our reserves would be 2 billion dollars less than the rollovers — not a position of strength.
Therefore, the decision to reduce the discount rate by 100 basis points can be sourced to requests by the PML-N government, with a long history of linking the discount rate to LSM growth, to the Fund staff to allow the MPC to reduce the rate in an effort to jumpstart the economy. It was only after concurrence was secured that the adjustment was likely made.
Copyright Business Recorder, 2025
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