SBP on monetary easing - "Main Nahin Giraonga"

Muddat huwee hai yaar ko mehmaan kiye huwe

Market expectations prevailed so did prudence while engaging with the IMF. IMF has already started asking some serious and tough questions for the next bailout plan for which policy makers are struggling to comprehensively respond. Politics will be at play when it comes to resource distribution between provinces and federation as well as key privatization matters.

In this scenario, the easiest way to keep IMF happy is to not show signs of complacency in spurring growth. Any mild indication of feeling comfortable, letting imports grow and feeling confident on FX reserves and external debt outlook will raise serious eye brows form lenders. And why not when each successive government has made a mockery under the garb of political ambitions pushing state at the verge of default.

It's like a seth asking for debt restructuring while buying his kids Audi and Porsche on their birthdays. Hence, monetary policy committee seems to be short of options too. Repeatedly, SBP governor has emphasized "significantly positive real interest rates" and receding inflation outlook. For sure, MPC is deciding on the basis of not 12 months forward but very short term basis.

In the very short term, inflationary triggers such as 1) Rs 7/unit fuel cost adjustment 2) pending pressure on PKR before new program 3) additional taxes under IMF bailout package 4) static performance of exports and remittances give little space for easing right? As much as we argue if tight monetary policy really curtails inflation such as energy, food etc that's the only tool available.

If only our exports grow at 10-15% per annum, interest rate would have been in single digits. Until and unless government gives impetus to value adding impetus to earn more dollars from abroad in the form of FDI, exports of IT services and new products and remittances, tighter monetary policy seems the only way forward. Primary and current account surplus is probably needed for good 3-5 years to reshape the economy. Growth and doves can wait or move towards non interest rate impacted industries.

Here's to kicking the can down the road again. In next monetary policy as well the battle will be between doves presenting data such as March's CPI of 19-20%, Current account surplus and fiscal debt servicing cost vs hawks showing red flags such as expecting currency depreciation, ongoing IMF talks, inflationary budget with new taxes and higher risks to inflation outlook. Relief can wait - don't know if the fruits of patience are sweeter or sour.