In a regime of changed stances but repeated circumstances, the house is once again divided on whether SBP will tango with the private sector this time around. Although four months may be a small time for the effects of the last announcement to ensue on private credit, the net decline of about Rs9 billion since the beginning of the current fiscal year may say something about the effectiveness of policy and its makers in the economy.
If one were to go by how the previous governor reined in the much-revered SBP, the night would have been considered just nippy enough for another rate hike. And the reasoning would have predictably fallen in the realm of government borrowing (outstanding stock) from SBP exceeding the prescribed and renegotiated limit of Rs1,150 billion by Rs75 billion in Oct-11 and Rs85 billion up till 11th Nov’11. Moreover, with inflation also expected to go up in the remaining part of the fiscal year, the balance of trade and balance of payments in 4moFY12 have turned deeper shades of red to stand at $6.9 billion and $1.4 billion respectively. Additionally, exchange rate yesterday depreciated to its lowest ever to about Rs88/$ and foreign exchange reserves, the economy’s blue eyed pride have declined by $1.3 billion during 4moFY12.
But what does one go by in the current scenario? Announcements such as a predilection and efforts towards a zero real interest rate really do gift the cat to the audience. Based on CPI numbers available for Oct-11, the real interest rate stood at 1.04 per cent. Thus the smartest of all would quickly be able to predict a 100bps cut in the discount rate, over the incoming and/or next monetary policy. Moreover, the continued stagnancy of the private sector may once again make a case for too high an interest rate, just ripe to be snipped off.
In the way stirring up the private sector, the government ignores the message that the financial system transmits into the universe; “even though you may not want our money, we would still like to give it to you!” evident in during and post the auctions the government stood out as a net retiree. Thus risk aversion seems to have become a structural phenomenon. Although SBP is trying to influence private demand for funds, it may have little control over the supply side and moreover, there seems to be an impending deficit on the latter anyway. If there had not been a shortage, then the central bank would have faced no need to inject Rs340 billion through OMOs as it did on November 25th.
To come to the policy maker’s defense, it seems to be unfairly carrying the burden of correcting this economy, when most of its problems have been generated from the political circles and a lack of foresight in the current and past fiscal corridors. Internationally, central banks’ objectives have just been reduced to controlling inflation only. Balancing and generating growth with this objective is the government’s problem. And why shouldn’t it be? Current expenditure eats up almost the entire budget; if the government has to overfeed it self then sometimes it should force its constituents to work, a little, at least. Moreover, a lesson in history, would easily teach that if an economy could be run by fighting and funding wars all the time, then the much held onto Moghul glory would not have been a thing of the past. From the frail private sector’s banner to the SBP: How can some more money at one point in time make up for the losses of lost decades?
