EDITORIAL: Rating agency Fitch’s projection that interest rate hikes will continue in frontier markets facing external pressures like Pakistan is not surprising. A press release from the State Bank of Pakistan (SBP) dated November 19 noted that “as a continuation of efforts to make the monetary policy formulation process more predictable and transparent in line with international best practices, the SBP decided to increase the frequency of monetary policy. reviewed six to eight times a year, ”which fueled speculation that interest rates would be raised at the Monetary Policy Committee (MPC) meeting scheduled for December 14.

Under the Reserve Bank of India Law as amended, the Monetary Policy Committee (MPC) is required to meet at least four times a year, in Bangladesh once a month or at least once a quarter, and the US Federal Open Market Committee holds eight regular meetings during the year and other meetings as needed. The key words for holding more frequent MPC meetings must be “as needed” and claiming that the monetary policy formulation process would be more predictable and transparent in line with international best practice just by adding two more meetings per year is inexplicable.

The market perception that interest rates will rise is rooted in the recent successful conclusion of the Sixth Staff Review with the International Monetary Fund (IMF) based on the implementation of a series of “preconditions” which include an increase in the discount rate. While the Prime Minister’s adviser on finance and revenues, Shaukat Tarin, has publicly acknowledged that the “prior” conditions or actions include the withdrawal of rupee 330 billion exemptions to be implemented through the adoption of a finance bill and not an ordinance, the petroleum tax to be increased by 4 rupees per month until it reaches the maximum limit of 30 rupees per liter and the base electricity tariffs be noted, the SBP has naturally been more reluctant to stress what it has accepted as preconditions.

Despite this reluctance, precedents indicate that, unlike the finance ministry, the SBP invariably fulfills all agreed-upon conditions – prerequisites as well as those of the program – even at the cost of much public criticism. Against this background, the cost of borrowing in Pakistan is almost double the regional average, a factor that undermines the ability of productive sectors to compete internationally. And since the government is the biggest borrower – its domestic debt has grown from 16.5 trillion rupees three years ago to over 26 trillion rupees today – any increase in the bank rate increases the cost of it. borrowing, thus increasing the mark-up component of the budget. with a consequent impact on the deficit. The fact that most of this borrowed money is being fed back into the economy and current spending has increased from 3.9 trillion rupees in 2017-18 to 7.5 trillion rupees today, it is no wonder that inflation is so high.

The rupee has also been allowed to erode and measures to stem its decline, including borrowing $ 4.2 billion from Saudi Arabia for one year at 4%, have so far failed. successful. The SBP justifies the erosion of the rupee by noting that the rupee remains undervalued as the real effective exchange rate (REER) for September 2021 was 95.8, down from the previous month’s 96.5 (the October and November data have not yet been calculated or downloaded). This is supported by the IMF press release dated November 21 at the conclusion of the Sixth Review in which it stated unequivocally that the SBP must remain focused on fighting inflation (what a discount rate higher is unlikely to achieve as noted above), preserving exchange rate flexibility (which fuels domestic inflation at a rate above the regional average as well as among our trading partners), and builds reserves international (unfortunately mainly by borrowing).

And, ironically, the Fund’s statement does not specify the period during which the inflation targeting regime is to be implemented: the preparatory work to formally adopt an inflation targeting (IT) regime to be implemented. medium term, underpinned by a forward-looking, interest-rate-focused operational framework. “

Pakistan is part of a Fund program without a predetermined path for the exchange rate and without an inflation targeting framework. If inflation targeting had been its objective, there would have been, according to the Fund, “the public announcement of medium-term numerical targets for inflation with an institutional commitment by the monetary authority to achieve these targets. . Other key features include increased communication with the public and the markets about the plans and objectives of monetary policy makers and increased responsibility for the central bank to meet its inflation targets. Monetary policy decisions are guided by the deviation of future inflation forecasts from the stated target, with the inflation forecast acting (implicitly or explicitly) as the intermediate target of monetary policy.

A comparison with other countries in the region reveals that India, not part of an IMF program, does not have an explicitly stated nominal anchor, but monitors various indicators in the conduct of monetary policy. Bangladesh and Sri Lanka have a monetary aggregate target, and Nepal has a fixed rate agreement. Last but not least, the central bank is required to seriously consider whether a further hike in the current interest rate will further increase the likelihood of stagflation occurring.

Copyright Business Recorder, 2021