Steady at the helm
Even though the state bank does its own talking now – the finance minister’s interest rate curtain raiser clearly found little encouragement – it still pretty much speaks for the government. Lacing the interest rate statement with decline in the external current account deficit and steady growth in remittances tells little about the bank, except how much monies will be parked in its vaults. It should have been more mindful of, and enlightening about, the present very low interest rate environment. The dovish policy stepped into unexplored territory when the decision to lower to 6.5 percent was made – which has been retained – so perhaps Governor Ashraf Wathra should have dwelled more on the present solvency of the credit markets, and the breakdown of credit off take of this ‘easy money’.
It ought to worry the governor that the monetary expansion has not triggered any private sector borrowing frenzy just yet. That main reason, of course, is the government’s continued dependence on borrowing to function; even for its day-to-day needs. In the simplest macroeconomic terms, therefore, the private sector remains crowded out because neither parliamentary legislation nor financial breakdown has stopped the government from borrowing, no matter which party is in office. Seen in the backdrop of FDI having dropped 58.2 percent in the previous fiscal, surely the bank must be wondering how much good so much credit flowing purposelessly can do to the real economy in the long run.
Granted, inflation has been dropping consistently – at least according to the statistics bureau – but monetary easing needs to be followed by robust production and expansion to keep check on prices. And that is precisely what is not happening; hence the disappointment in manufacturing, exports, etc. The state bank is in a precarious position, and might need to revise the rate sooner than the board might have originally intended. Unless the economy picks up – which will need serious overhaul of state institutions – the bank will not be able to keep anchor at 6.5 percent for too long. And another opportunity for triggering growth, provided this time by the oil drop, low input prices and global risk aversion, would be wasted.