KARACHI – Mian Nasser Hyatt Maggo, President FPCCI, has proposed that the State Bank (SBP) of Pakistan should not further increase the Monetary Policy Rate as it can result in stagflation and adverse effects on industrial growth. He said that the use of the instrument of Policy rate for controlling inflation has been counter-productive as Pakistan’s economy is less integrated with the financial sector. He was basing his recommendation on the evidence-based findings of the latest Monetary Policy Brief released by the Policy Advisory Board of FPCCI.
The Policy Advisory Board of the FPCCI working under the Chairmanship of the former Federal Secretary Mohammad Younus Dagha has published a policy brief titled ‘Assessment of Monetary Policy Effectiveness in Pakistan’ which formulates FPCCI’s input for the upcoming monetary policy. The paper gives insight into the causes of inflation and the effectiveness of monetary policy based on the analysis of economic fundamentals, business cycle positioning, and the monetary policy survey for which the respondents were economists, financial market participants, and industry representatives.
The report finds that only 7 percent of the commercial entities do actually borrow from the banking and financial system of the country; and, this fact renders the monetary tightening for inflation control and management through increasing policy rate ineffectual and restricts its efficacy as a tool.
The report warns that Pakistan is heading towards stagflation with inflation mounted to 11.5 percent whereas the core inflation was recorded at 7.6 percent in November 2021. The State Bank of Pakistan (SBP) increased the policy rates by 25 basis points and 150 basis points during the Monetary Policy Committee (MPC) meetings held in September and November 2021 respectively. This has created a speculative momentum that raised cut-off yields by 228 basis points for three-month T-bills to 10.78 percent. It is imperative to note here that supply shocks such as a hike in commodity and oil prices provided the impetus for current inflationary pressure. In addition, massive depreciation of the Pakistani rupee against the US dollar along with measures under the IMF Program has aggravated inflation further. Although the real interest rate is negative in Pakistan, however, the difference between policy rates and core inflation is higher in Pakistan i.e. 1.2 percent as compared to India (-1.8%), China (0.7%).
The Policy Advisory Board of FPCCI recommends that the SBP to target core inflation rather than general inflation. Moreover, inflationary pressure can be better controlled by shifting the exchange rate regime from flexible to a managed float. Government should also use regulations and effective enforcement to counter speculations and manipulations by cartels that are playing havoc with the prices and exchange rates.
