Macroeconomic Conditions signal turbulence: Dawn

A.B. Shahid

THE recent monetary policy announcement by the new State Bank governor sends a clear message: that there is little in terms of improvement in the state of the economy to warrant the much demanded monetary loosening.

Based on traditional logic, the stance is correct; while fiscal, trade and current account deficits are already high there may be further slippages. First, with Federal Board of Revenue (FBR) collecting only Rs544 billion in first half of FY09, the full-year Rs1.36 trillion tax revenue target may not be met. Impliedly, public borrowing could stay high squeesing credit to the private sector, which won’t help contain the economic downswing.

Second, anticipated decline in trade deficit (courtesy falling imports) may be less than expected since: (i) export growth may decelerate due to global recession and infrastructure bottlenecks causing intermittent power and gas supply shortages; (ii) anticipated decline in oil import bill may turn out to be less than its projection.

Besides, deceleration in Consumer Price Index since September 2008 was moderate relative to Sensitive and Wholesale Price Indices, while Core Inflation Index (the peg for interest rates) remains what the governor called ‘stubborn’. According to him, ‘this signifies that demand pressures have not completely dissipated despite a slow down in economic activity.’

For once, SBP explicitly accepted that accumulation of excess demand since 2004 prepared the slope for inflation to slip uncontrollably, and in 2008 it caused multiple deficits, raised production costs all round, and blunted growth. To limit its fallout, SBP considered it expedient to continue its tight policy stance and to keep its discount rate unchanged at 15 per cent.

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