LAHORE: In less than three years, the central bank has changed its monetary position three times from hawkish to accommodative and back to hawkish. Is it the bankruptcy of the government or the central bank?
The current governor of the State Bank of Pakistan (SBP) has spoken out in support of the policies of the current regime, but the volatility of the monetary stance shows that either the policies were not in the right direction, or the central bank did not understand the situation. on time.
Every central bank wants foreign exchange reserves to increase and strives for a stable currency. Currencies support stable and emerging economies based on exports (or foreign inflows through investment). Over the past three years, our central bank has tried many expensive ways to increase its liquid reserves.
During periods of high interest rates, the bank allowed foreign funds to invest in short-term treasury bills at prevailing domestic market rates.
Investors were allowed to resume their investment in dollars, including the interest paid on these invoices.
It turned out to be a lucrative business for investors who didn’t get even 10 percent of the profits from their dollar investments in the global market.
At its peak, treasury bills bought in dollars exceeded the $ 3 billion the central bank included in its foreign exchange reserves.
Then came covid-19 and interest rates were as quickly reduced as they were raised to attract hot money.
The hot money evaporated with the maturity of treasury bills. Investors weren’t losers because they got all their dollars back with high interest. The fall in interest rates was not attractive to funds, however, and the influx of speculative capital stopped.
This was a step back from the efforts of the SBP, which therefore introduced another program. This time it was for Pakistanis overseas. They were lured to open dollar accounts in Pakistan and the central bank guaranteed a seven percent rate of return. This was seven times higher than the interest depositors receive on dollar accounts in other countries.
These Roshan digital accounts now have deposits of over $ 3 billion. Commercial banks that open these accounts receive the full mark-up from the central bank.
The mark-up provided is double the mark-up that Pakistan pays to its major creditors like China, Saudi Arabia or the United Arab Emirates on their short-term loans. These deposits strengthen foreign exchange reserves.
Interestingly, foreign exchange reserves have not been strengthened by trade. In fact, over the past two quarters, we have been losing more foreign currency to imports which are more than 2.5 times our exports. The future is looming as despite all these efforts, the rupee has remained volatile throughout.
We are rapidly increasing our foreign debts as foreign exchange reserves continue to deplete despite the regular injection of foreign loans and digital accounts.
Roshan digital accounts are not technically foreign loans, but deposits are a liability that must be offset on demand in foreign currency.
We could see the resurgence of hot money as policy rates rise, as the central bank also indicates (at least one percent this fiscal year).
Foreign earnings from exports would not increase significantly or could likely slow down as a result of the many measures taken by the government and the state bank. Gas tariffs of exporting industries operating in Punjab have been increased recently.
The gas tariff differential between the other three provinces and the Punjab would be tripled (over 50 percent of exports came from the Punjab).
The central bank raised the policy rate 1.5 percent to the top of a previous increase of 0.5 percent during the last monetary policy. This will increase the cost of borrowing for everyone.
At the same time, the reserve requirements of all banks have increased from five to six percent.
This will suck up enormous liquidity from the banks. With the increase in policy rates, commercial banks would be more inclined to lend to the government, which is the biggest borrower. It will crowd out credit for the private sector which has recently seen a renewed appetite for credit.
The higher interest rates are expected to increase the cost of servicing the state’s debt by around Rs.3 trillion. This means consuming any excess revenue that the Federal Revenue Council (FBR) has collected in the past four months.
To generate more revenue, the state should announce new revenue measures. Price stability would be a lost dream because we will experience cost inflation. The rich can navigate with a few grunts, but it will be a nightmare for the poor to survive each passing day.