Karachi : The Policy Advisory Board – Federation of Pakistan Chambers of Commerce (FPCCI) has urged the State Bank of Pakistan to cut the policy rate by 250 basis points in the forthcoming monetary policy committee to target core inflation rather than general inflation. The core inflation in February 2023 stood at 17.1 percent whereas general inflation was 31.5 percent in the same period. Given the bleak economic outlook with the decline in the real sector and deterioration in business confidence, it is imperative for the State Bank of Pakistan to not control supply-induced general inflation by raising policy rates.
Pakistan’s current policy rate of 20.00% is well above its regional peers, including China, India, and Bangladesh, for which the policy rates are 2.75%, 6.50%, and 6.00% respectively. Inflation in Pakistan, however, appears to be deep-rooted, and it mainly stems from substantial exchange rate depreciation, unprecedented hike in international commodity prices, multiple rounds of hikes in energy tariffs, and other prescribed measures under the IMF program. Despite the massive hike in the policy rates by 1,025 bps from 9.75% to 20% during February 2022 and February 2023, inflation remained stubbornly high and further surged from 12.20% to 31.5% over the same period.
The State Bank of Pakistan’s (SBP) approach to contain inflation by increasing the policy rate turned out futile and has adversely impacted the economy, deteriorated the fiscal equation of the country, and has severely hit the already struggling business community. According to the Ministry of Finance’s Monthly Economic Update & Outlook February 2023, markup payments grew by 77 percent during the first half of FY 2023 driven by higher servicing on debt amid a higher level of interest rates.
The impact of the hike in interest rate could be seen in a reduction in bank advances to the private sector that took a dive to 73 percent during the first eight months of the fiscal year 2022-23, according to the data released by the central bank. Overall SBP and commercial banks’ credit portfolio reflects that the government sector accounts for 65.91 percent of total credit, whereas the private sector share is a meager 34.09 percent as of February 2023.
Almost all sectors bear the brunt of lower production in the backdrop of soaring inflation, pushing the cost of doing business. The large-scale manufacturing fell by 7.9 percent year on year in January 2023 due to a shortage of raw materials, expensive credit, and political unrest.
FPCCI strongly recommends that the SBP to target core inflation instead of general inflation as it excludes the volatile components of the inflation, i.e. energy and food prices. In addition, the prudential regulations measures should be used to curb demand pull in particular sectors as the monetary policy measures have differential impacts on the spectrum of industries and income classes. Efforts need to be made to control price manipulation and hoardings in liaison with the respective federal and provincial government departments. An active and effective Competition Commission of Pakistan (CCP) and an effective price control magistracy system also need to play their due role.
