Monetary policy spin


DON’T worry, be happy because all is well and tomorrow is another day. That, in a nutshell, summarises the assessment of the health of the economy provided by the State Bank of Pakistan (SBP) in its latest monetary policy statement.

In all the years I’ve been reading these documents, this last one gets the medal for being all spin and no substance. I know that a central bank has to choose its words carefully. But this last statement reads like it was drafted in Q-block, the finance ministry headquarters, by some public relations hack.

The opening line gives it away. “Increasing number of economic indicators in the current fiscal year have [sic] moved in a favourable direction” it declares boldly. Really? If that’s true, how come the statement itself talks in detail about only one: inflation?

Yes, inflation is down, coming in far lower than anybody’s forecasts. And yes, this has opened the door for reductions in the discount rate. But the reasons behind this are more contingent than anything else, owing in large measure to the oil price declines. In any case, the shift in borrowing away from the SBP and towards the banking system must have played a role too, and this merits acknowledgement.

But here the good news ends. The spin kicks in when the statement tries to make falling inflation the lens through which to interpret every other economic indicator. So what if large-scale manufacturing is still in the doldrums? The sector “is likely to gain traction due to recent cut in policy rate and low prices of raw materials” we’re told. Interest rate cuts due to falling inflation, and low prices of raw materials are about to lift manufacturing, supposedly.

Really? So if falling interest rates are going to help lift manufacturing, how come private sector credit offtake “remains subdued”, according to the statement? Where is the appetite for credit that would be the first indicator that falling interest rates and inflation are triggering activity in manufacturing?

It turns out that private sector credit offtake “largely reflected the underlying trends in falling inflation”. I’m not sure how to square this with other indicators, about which the statement says nothing. For instance, why is the government’s appetite for credit unaffected by inflation? And what about the large-scale injections of liquidity into the banking system that the SBP has been making, through instruments that are meant to be for short-term purposes only, like Open Market Operations?

It’s time that the erosion of the State Bank of Pakistan’s authority be taken up at a political level.
These OMO injections have crossed the Rs700bn mark in three auctions since Feb 20 this year. If you lower the bar a little, and look at how many injections there have been that are larger than Rs600bn, you’ll find seven since January this year. The last time we saw such massive injections on such a continuous basis was in the run-up to the last elections, but at least back then there might have been sound reasons for why they were necessary.

What are the reasons now? Would the same genius who wrote this MPS care to tell us how falling inflation provides the context for sharply rising OMO injections?

Perhaps some context is provided by the state of government borrowing. Till the middle of March, the government retired Rs511bn from the SBP, and borrowed just over Rs1 trillion from scheduled banks. So the government is borrowing from the banks and paying off the State Bank. And the State Bank is providing the funds to the banks in the form of OMOs. A nice little mutual back scratching arrangement, except it’s not all that little considering the amounts that are being exchanged through it.

Clearly, this speaks to something wrong in the fiscal framework, especially since the same proportions were reversed last year, when almost all the borrowing was from the SBP and scheduled banks were ignored.

Speaking of the fiscal framework, all that the statement has to say is that things are “on track”. Really? And what track are they on? If all is well on the fiscal side, why is government borrowing still so elevated? Why is the finance minister continuing to talk about the need to raise an additional Rs150bn in support of military operations and IDP repatriation? What happened to the circular debt, that we were told in the annual report will need to be retired before the end of the fiscal year? So many questions, and all we get is one quick sentence reminiscent of the ‘kiss the mammoth and run for your life’ approach to dealing with touchy issues.

The statement amounts to intellectual dishonesty, and a case can be made that it is a deliberate attempt to mislead the reader. Since it is part of the State Bank’s job to keep the National Assembly informed about the economic situation in the country, a case can also be made that the Bank is not only derelict in its duty, but actively seeking to mislead the assembly at the behest of the sitting government.

Perhaps it’s time that this matter of the erosion of the SBP’s authority be taken up at a political level. How many of its other functions are the authorities at the Bank allowing to come under the influence of politics? Is the SBP being similarly sensitive to the wishes of the government in discharge of its regulatory obligations? If higher authorities at the SBP think that bowing before political interests is a good survival strategy, they should understand that politics is a stormy business in this country and cuts in all directions. It would be a good idea to not wade too far out, and I only hope that this advice isn’t coming too late in the day for them. By some assessments, they’re already hip deep in the mire at this point.

The writer is a member of staff.

khurram.husain@gmail.com

Twitter: @khurramhusain

Published in Dawn March 26th , 2015