There's a certain hint of optimism that the Monetary Policy Committee might reduce the policy rate at its upcoming meeting on June 10th.
However, such hopes have been dashed before, as in April's meeting, when the State Bank of Pakistan kept the rate at a record high of 22% for the seventh consecutive time. It has been almost a year now since we reached this level, with rates first being raised in June last year.
Several factors are rekindling hopes for a rate cut: a slight decline in the Karachi Interbank Offered Rate (KIBOR), T-bills rates, recent reductions in petrol prices, a slower pace of price increases, and a current account surplus.
But it's crucial to recognize that a reduction based solely on a few positive indicators might be shortsighted. It could create the false impression that the real underlying causes of our high rates have been addressed.
So far, I haven't observed any structural changes in the data flow indicating that the rates should come down.
Consider the exchange rate: it has remained at its high level despite high interest rates. Expectations were widely held that it would fall below Rs 250, as crackdowns on illegal forex dealings were carried out and the IMF continued to engage with Pakistan. Such high interest rates could have attracted significant inflows, but nothing materialized because the primary issue is low confidence in the system, and that still persists.
Moreover, in the last five years, the Pak Rupee has lost more than 50% of its value, yet this devaluation has had almost no visible impact on exports, which have remained stagnant. This feeds back into a loop, keeping the exchange rate elevated.
Most importantly, governmental expenditure shows no signs of decreasing. Over time, the largest portion of this expenditure, interest payments, will only increase since the rates remain high. This is another feedback loop. High public sector expenditure is the biggest reason for the high interest rates—rolling over government debt at any cost.
And finally, the black hole of circular debt in the energy sector consumes whatever is thrown at it.
This time, the State Bank of Pakistan (SBP) must ensure that if the policy rate is reduced, it remains on a downward course and won't need to be raised again. If, after a reduction, it is required to be raised again without any substantial external reason, it would raise a significant red flag for our economic management. The confidence the central bank has generated in the system would be lost for quite some time. Additionally, any nominal reduction could be perceived as a trend, and trend expectations must be based on solid foundations.
In any event, the issues we face are primarily structural in nature and not about 'taming of the shrew' with the policy rate as the only weapon in our arsenal.
The next MPC meeting is on June 10th, and three days before that, the federal budget is scheduled to be announced.