DNA
LAHORE: As the State Bank of Pakistan has kept the policy rate unchanged at 22% at its recent Monetary Policy Committee meeting the Ferozepur Road Industrial Association (FRIA) has suggested the central bank to adopt an accommodative monetary policy stance instead of keeping it at higher level.
The FRIA Senior Vice Chairman Shahbaz Aslam while demanding the competitive interest rates at regional countries’ level, said the SBP’s stance of keeping the monetary policy rate at 22 per cent was already high, compared with the markup rate of China, India and Bangladesh.
In a statement issued here on Friday, the FRIA leader, who is also PIAF EC member warned the central bank of aggressive high key policy rate, as the present economic crisis is the outcome of the government’s wrong economic policies.
The investors were stuck in a selling frenzy over economic fallout from the country’s record trade deficit and the fear of another discount rate hike, Shahbaz Aslam said.
The FRIA SVC observed that the central bank last hiked the policy rate by 100 basis points to 22% in an emergency meeting in June ahead of an agreement with the International Monetary Fund (IMF). Since then, it has maintained the rate in meetings held on July 31, September 14, October 30 and December 12.
He took note of several significant developments since October. Firstly, the successful finalisation of the staff-level agreement under the International Monetary Fund (IMF) Stand By Agreement (SBA) program, is expected to bolster financial inflows and enhance SBP’s foreign exchange reserves. Secondly, the gross domestic product (GDP) growth in the first quarter of 2024 met expectations for a moderate economic recovery. Thirdly, recent surveys indicated a positive shift in consumer and business confidence. Finally, core inflation persists at elevated levels, showing a gradual decline.
Considering these developments, he affirmed that the current monetary policy stance is not suitable to meet the inflation target of 5-7% by the end of the fiscal year 2025. This assessment hinges on sustained targeted fiscal consolidation and timely realisation of planned external inflows.
He said that the MPC’s decision did not take into account the recent hike in gas prices in November, which pushed inflation higher than initially expected. However, there are some balancing factors, like the recent drop in international oil prices and increased availability of agricultural produce, which could offset these effects.
The MPC assessed that the real interest rate continues to be positive on a 12-month forward-looking basis and inflation is expected to remain on a downward path. However, SBP did not provide inflation estimates in today’s MPC. The Governor emphasised that SBP reassesses its inflation forecast twice a year, in July and January. To highlight, in July 2023, SBP projected an average inflation for fiscal year 2024 in the range of 20-22%.
Following the IMF agreement, the Fund asked the SBP to maintain an appropriately tight monetary policy that counters inflation. While inflation clocked in at 31.4% in September, the SBP’s Monetary Policy Statement said it was expected to decline in October and then maintain a downward trajectory, especially in the second half of the fiscal year. It cited downward adjustments in fuel prices, easing prices of some major food commodities, and a favourable base effect for this projection.
The MPC noted that the higher-than-expected increase in gas prices contributed 3.2 percentage points to the 29.2%year-on-year inflation in November 2023.
Moreover, core inflation, which removes volatile factors such as food and energy prices when measuring inflation, remained sticky at 21.5% during the month, slightly lower from its peak of 22.7% in May 2023. Inflation expectations of both consumers and businesses, though improving in recent months, remain at an elevated level and is coming down gradually.
The FRIA SVC asked the SBP governor to fulfill his commitment of maintaining an accommodative monetary stance in the near- and long-term to support the rare recovery, amid uncertain Omicron coronavirus variant worries and challenges.
He stressed the need for reduction in the discount rate, arguing that low key policy rate is essential to make the Pakistani exports sector, as well as the local industry competitive.
Shahbaz Aslam said that the achievements in exports and stabilisation of the economy through the monetary policy measures now required to sustain again by extending reduction in the policy rates so that the debt liability of the business sector is compensated through lower markup rate.
