No need to create recession: SBP chief


Acting Governor of the State Bank of Pakistan (SBP), Dr Murtaza Syed, has said that Pakistan will not risk creating an economic recession to achieve a positive inflation-adjusted interest rate, soothing concerns. market fears of another rate hike after inflation jumped to 25%.

In an interview with The Express Tribune, the acting governor agreed there was a need for better coordination mechanisms to align monetary and fiscal policies – an approach that appears different from that taken by the previous governor.

“We don’t need to create an economic recession to bring inflation down and a positive real interest rate can be achieved in the longer term,” the governor said.

He explained that economic conditions would determine when to achieve the positive interest rate.

Compared to the average inflation projection of 18% to 20%, the real interest rate is still negative 3% to 5%. Pakistan has pledged to the International Monetary Fund (IMF) to guarantee a positive real interest rate.

The central bank raised the policy rate by 125 basis points (bps) to 15% on July 7 to combat soaring inflation amid a sharp depreciation of the rupee.

It was the sixth rate hike since the central bank began tightening monetary policy in September last year, pushing the cost of borrowing to the highest level since April 1999.

However, the inflation rate soared to 24.9% in July, raising fears that the central bank may tighten monetary policy further. However, the governor disagreed.

He said there was no need for a knee-jerk reaction to such shocks as the central bank’s average inflation forecast remained unchanged in the 18%-20% range for the current fiscal year. .

“Our forecast is quite good and over the past three to four years we have stayed closer to the average inflation forecast,” he added. Inflation of 25% in July was in line with central bank expectations.

Unfortunately, the difficult decision to cancel the fuel price subsidy turned out to be “additional inflation”. If prices had been raised smoothly instead of keeping them suppressed for four months, inflation would not have reached 25%, the acting governor said.

He said that over the past two months inflation has remained very high due to the pass-through of the pending price adjustment and “now prices have reached a certain level where they should stabilize.”

Inflation would start falling after 10 to 11 months, the governor said.

“Inflation is much worse than a slight slowdown in the economy,” Syed said, adding that Pakistan had the advantage of posting 6% growth for two consecutive years.

After reaching 6% growth, “we can afford to slow the economy down, but we cannot slow it down to the point where there is danger of a recession”.

The governor stressed that trying to achieve 6% growth for the third time with the current weak economic structure would keep Pakistan in the IMF program for a longer period.

“Pakistan cannot afford to have 6% economic growth with this structure of the economy for several years” and the country could only grow above 6% when the ratios of investment, export and savings were high as a percentage of GDP, he added.

Syed said that the budget for the previous year aimed for a strict fiscal policy, but in fact the government at the time implemented a very expansionary fiscal policy. “We couldn’t tighten monetary policy to such an extent that it could have brought down the economy.”

In the seventh month of the fiscal year, “we learned that the fiscal situation was actually opposite to what had been expected, and then the central bank began to rapidly raise the interest rate.” Since March, the central bank has raised the rate by 5.25%.

Asked, Syed said he was in favor of some coordination between monetary and fiscal policies. “But I also think that a coordinating entity, whatever you call it, should respect the monetary policy mandate and we should respect the fiscal policy mandate.”

In January this year, the IMF forced the federal government to abolish the Monetary and Fiscal Policy Coordination Board (MFPCB) which had been established in 1996 for better coordination of monetary, fiscal and trade policies. In its place, a loose liaison is established between the governor of the central bank and the minister of finance.

“The SBP Act allows for coordination and we can do whatever we want and the finance minister and the SBP governor can come up with a mutually agreed deal,” he added.

The acting governor said the IMF was confident that the MFPCB dictated monetary policy and decided the interest rate. The federal government could have given advice, but it should not have questioned the independence of the monetary policy committee, he added.

Amendments to the SBP Act of 1956 also permanently closed the doors to federal government borrowing from the central bank, which created debt management problems for the government.

The governor said some would have argued for implementing zero quarterly borrowing instead of disabling it altogether, but in the past that requirement was not met by the Treasury Department.

He said there was another way for the federal government to borrow to raise the tax-to-GDP ratio in the previous fiscal year.

“I am neither for nor against any proposal but I believe that things are changing and that the SBP law is a living document which can be amended but first we must look at how it evolves,” he added.

Published in The Express Tribune, August 6e2022.

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