The central bank is expected to further cut the discount rate at least by 50 basis points (bps) in line with, what the analysts believe, pro-growth regional trend, based on prioritising the “feeble” economic growth to avoid economic slowdown. A foreseeable widening deficit in the country’s current and fiscal accounts, however, the economic observers say, might make the State Bank go for monetary tightening.
“During FY12YTD, the private sector credit has contracted by Rs48.3 billion as against expansion of Rs23.7 billion in the same period last year,” he said. Weakness in Pakistan’s fiscal and current accounts, the analyst said would, however, keep threatening the expected monetary easing cycle in the second half of FY12. Sohail said during the current year the country’s current account was expected to stand to the tune of $2.7 billion, 1.1 per cent of GDP, against a $268 million surplus last year.
Adverse commodity price shocks and slowdown in capital flows were the reasons, the analyst cited, for the widening of current account gap. He said the country’s fiscal deficit was expected to escalate beyond 6.0 per cent of GDP, which includes one-time impact of energy sector debt swap deal, higher power related subsidies and shortfall in overall revenue collection.
Asfar Bin Shahid, a senior economist, however, warned that slashing the interest rate further would adversely affect the returns on savings. “It’s a double edged sword as the savings (of one-year maturity) would be negatively impacted,” he said. The analyst slammed the government for its failure to curb profiteering in the retail and wholesale markets that he termed as major stimulus behind inflationary pressures in the poverty-stricken country.
As the State Bank of Pakistan (SBP) is due to announce its monetary policy statement (MPS) on the 30th of this month, the investors on the country’s volatile capital market are cautiously moving, one of the reasons for sending turnover at the volumes-starved Karachi bourse to record low of 28 million shares and the benchmark 100-index shedding 133 points on Wednesday. “We expect another round of 50bps cut in the upcoming MPS,” said Nauman Khan of Topline Securities. The analyst bases his assessment on the ongoing pro-growth trend followed by the regional economies like Indonesia, Australia, Taiwan and Singapore who, recently, revised their policy rate downward to sustain economic growth. Khan said a likely fall in average inflation by the initially targeted 12 per cent during FY12, positive real interest rate with November (YoY) CPI inflation to range from 10.7 to 11 per cent and the rupee’s depreciation against US dollar to a controllable level of around 1.5 per cent in FY12YTD would be the apparent attributable factors for monetary easing by the regulators. He said fears of economic slowdown had forced various central banks in the region to focus on growth instead of tackling inflation. “(The) central bank(s) of Thailand and Malaysia are (also) expected to follow the same policy measures,” Khan said. Muhammad Sohail, a senior analyst and chief executive officer of Topline Securities, backed Khan by saying that the State Bank, in the upcoming MPS, would continue to pursue a loosening monetary policy stance to induce the currently “stifled” private credit off-take.
“You curb profiteering and inflation would come down to single digit of 8 to 9 per cent allowing the central bank to cut interest rate to the same level,” A.B Shahid said adding “this would bring the accumulative discount rate to 12 per cent.” The economist said the present 12 per cent discount rate was still high in a country like Pakistan where the businesses were “over-leveraged”, meaning less liquidity and more borrowings. About the regional trend, he said India was a country which had constantly been tightening its monetary policy for more than decade. “Let’s see if SBP freezes or reduces the cost of borrowing.”
