MONETARY POLICY ON THE ANVIL

BUSINESS COMMUNITY EXPECTS 50-100BPS CUT

AMANULLAH BASHAR
(feedback@pgeconomist.com)

Nov 21 - 27, 2011

The inflation and discount rate are the same at 12 percent. The popular demand of the stakeholders is a further cut of 50-100 bps in the interest rate as the State bank of Pakistan is set to review the monetary policy for next two months on November 30.

Actually, the assumptions for a further cut in the interest rate is based on the pleasant outcome of the last monetary policy review in which the central bank made a drastic cut of 150bps in the discount rate which resultantly resuscitated various segments of the economy especially the real estate which had gone to the rock bottom as well as the auto financing where business movement is visibly noticeable after reduction in the interest rate.

It is interesting to note that soon after the drastic cut of 150bps in policy rate of the central bank, the investors have once again started taking interest in property development and the big business houses like Arif Habib have once again dived in property business. They are coming with a huge project in the name of "Naya Nazimabad" which is adjacent to North North Nazimabad.

In fact, according to basic principles of the economy, the movement in real estate sector is taken as a basic indicator about the state of economy. It may be mentioned that the real estate sector was lying inactive for over four years primarily due to high interest rate, which is obviously beyond the reach of common person.

Pakistan offers great investment opportunities in property development in the backdrop of a huge gap between demand and supply.

At least over eight million new housing units are immediately required to meet the housing need of the population. Immediate steps are needed for development of affordable housing units. No one can stop emerging of slums even in the heart of the urban centers throughout the country.

Although the civic bodies have done well in development of infrastructure, due to excessive involvement of political considerations the important area of housing development remained neglected due to excessive politically supported corruption.

Unfortunately, the basic human need of housing has been taken as a lucrative source of legal and illegal income. The corruption is so rampant in this area that a number of political groups emerged with a sole interest of land grabbing.

It is extremely important for the good of the common man to keep development agencies away from the reach of politically infected elements to revive the concept of a civilized society badly damaged by the land grabbers under the cover of politics.

IMPACT ON TRADE & INDUSTRY

The trade and industry leaders have a strong point to substantiate their demands for a single digit interest rate vital for growth based policies in the economy. According to them, the mounting inflation triggered by high energy prices and heavy borrowings by the government has crowded out the small and medium enterprise which are the real backbone of the economy.

The interest rate in Pakistan was taken as a bookish tool to contain inflation while the inflationary pressures were generated by the unnatural energy price inflation, which has an overwhelming effect on general prices.

The tightening of monetary policy alone cannot arrest the rising inflation. The goal of controlling inflation needs a strong support from fiscal measures which are more important to contain inflation rather than increasing interest rate, which always suppresses the economic activity.

However, the financial analysts see a low probability to what they called the rumors about 50-100bps cut in discount rate in the upcoming monetary policy statement for Dec-January 2012. They were of the opinion that the central bank would maintain a status quo in policy rate till Mar 2012.

The expert opinion about status quo is based on the current discount rate level at 12 per cent, which is at par with the government's inflation target of 12 per cent for financial year 2012. The analysts feel that the current rate of inflation leaves a little room for further cuts. In this backdrop, the central bank would like a 'wait and see' for the impact of the sizeable 150bps cut in discount rate in the last monetary policy review.

The uncertainty regarding future decision of SBP is due to the fact that the central bank has not clearly specified its full year projection for 2012 fiscal year.

It may be noted that in its Oct 2011 policy review, the State bank of Pakistan had remarked on a 150bps cut. The probability of meeting the 12 per cent average consumer price index (CPI) inflation target for financial year remained high. The SBP had added that conditional upon factors such as adjustments in the administered prices of electricity and oil and a projected broad money growth of 15 to 16 percent SBP's forecast of average inflation ranges between 11 and 12 percent during financial year 2012..

It is yet to be seen whether the central bank's forward looking monetary policy stance could find further room for reducing DR based on a potentially lower than 12 per cent inflation expectation. A full year estimate of inflationary trend may suggest potential room for another 50bps cut sometimes in Jan-Feb 2012.

Conclusion: The price inflation on the back of unaffordable increase in petroleum and electricity prices poses a serious challenge of unemployment as well as street crimes. It is the vibrant economy, which creates job opportunities both at micro and macro levels. Let the cottage industries, small and medium business grow by providing easy and affordable financing. The creation of job openings is the positive way to enable 60 percent of the young population to involve in positive activity rather than pushing them towards the dark street of crimes. Let the business grow through support of easy financing, which would also save our big organizations like PIA, Pakistan Steel, Railways and other sick units owned by the state from overstaffing which is a primary reason for dragging these organizations towards financial mess and making them heavy burdens on national exchequers.