Who wrote the monetary policy?


It seems like the monetary policy department outsourced the policy decision to some one who should be renamed a hundred and fifty basis points from his earlier well-acclaimed alias. Because putting it in simple, matter of fact and straight words, the report did not seem like it was drafted by an economist even from a remote perspective.
Had it been an economist, s/he would have known that decline in T-Bill yields and KIBOR post the last rate cut is not a respectful “contribution” of the almighty SBP, rather it is a plain and simple outcome of the discount rate being a benchmark rate for all interests rates in the economy.
The report further highlights how the private sector has ‘aptly’ predicted low inflation reflected by their increased participation in 12-moT-Bills. Had even an amateur economist studied trends in T-Bill participation, they would have been easily able to tell that the primary determinant of tenure selection in T-Bill auctions is the expected policy rate in the upcoming announcement. This can be easily verified by looking at participation patterns during FY11 when 3moT-Bills were the bonds of choice in 1HFY11, during which the discount rate was increased thrice consecutively. Moreover, post Jan-11, the market shifted their preferences in favour of 6moT-Bills when the discount rate was expected to be maintained. And only recently, that is in Jul-11, 12moT-Bills emerged as the queen of hearts as the financial system opted to maximize their return by choosing the bond of highest longevity and return expectations were aligned with a lower discount rate. Nowhere in the contemplation of our respected primary dealers has inflation been an active consideration.
The policy document brazenly takes credit for lower inflation in Sep-11 and attributes it to the discount rate cut in July. Thus, our esteemed writer in addition to not possessing knowledge about our oh-ever- so- complex-economy is also not in the business of following general news. Else, it would have come to his understanding that low inflation in the previous few months has been on account of the change in base year, and, the high base effect due to floods last year and not because of the graciousness of SBP. And even more sadly, had he been an economist, he would have known that monetary policy affects the economy with a lag of six months to a year. But only if.
Which takes us to the deep and heated epicenter of the real and political motivations of the recent decision. Extrapolations based on quarterly data would reveal that the government intends to borrow more than Rs1 trillion in Q2FY12. Assuming that it would borrow the same amount in the remaining half of FY12, a discount of 200bps would imply savings of Rs60 billion in the next financial year when the current problems relative to security, power outages etc. would have become chronic. So while our dear ‘writer’ may not be an economist, you must admit that he is indeed quite sharp and resourceful.
One wonders why so many institutions have been created in this country when none have access to independence, and none are subject to any checks or balance. While the SBP has not so shamefully revealed itself to be a pawn of the government, one wonders if this country really requires the educated few to do anything for it.
For those in power seem to know it all; why else would the esteemed minister of information correlate two weekend holidays with a higher population growth rate? She must know something that the economist surely does not.

The writer is an economic researcher


  1. The mighty cut in policy rate is surprising but the article’s tone is exaggeratingly critical given SBP credibility and talent which the market openly acknowledges.

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