Further Tightening/Widening of Celling & Floor Rate ?

The day Pakistan decided to go to IMF, it was all over, by this I mean ‘ECONOMIC INDEPENDENCE’ that we have passed to the third party.

All these reports, notes, articles write up, tv talk shows, arguments and criticisms are simply fillers & nothing more. It does not provide guidance, adequate improvement or cure to the problems. Then what are they criticizing about ? Where is the suggestion that what needs to be done for economic gain ? This is why in their articles or in a tv talk shows, critics are never able to provide figures or the size that what needs to be done and how much will be the monetary gain.

I am writing with a sad note that not even a year has passed, these champions of economic or self-proclaimed experts were extremely critical of overvalued Rupee & higher inflation, they are today criticizing SBP’s and governments Hawkish policy. It is because they are only good talkers & scribblers. Except for few, most of them do not have any practical working experience & hence they totally rely on Hypothesis and Theories.

Instead of giving counter argument against business communities by asking them to pay taxes and come forward to help in documentation of economy they too have joined the bandwagon and are crying wolf.

No Sir, make sure that you tie up your boats at the dock so that they don’t get swept down the river. This time the demand from FATF & IMF is firm and the witch doctor is helpless. Miracles do happen, but this time it won’t.

Pakistan’s Central Bank will announce its Monetary Policy on Monday (Sept 16). Though export refinance needs to be adjusted/corrected. There is a huge demand from the business community to slash Policy Rate. They are unhappy with the pace of Rupee depreciation, either because of their inability to negotiate with the importers or they have nothing to offer them. The business community that was earlier blaming the newly elected government to go for IMF PACKAGE recently met PM IMRAN KHAN and are demanding policy rate cut, complaining about high cost of doing business. In its raking of EASE of DOING BUSINESS it has improved by 11 notches to 136 out of 190 economies. Let me remind my readers that in 2007 Pakistan was ranked 74th (Yes, some may not like, it was during Musharraf’s era)

Business community is well aware about the working condition when partnering with IMF, as Pakistan has approached IMF on more than 20 occasions. Loans given by them are always stiff and conditional with certain understanding between lenders and the borrowers. Borrower gives commitment in writing to meet all the obligations.

Pakistan’s budget deficit has hit an alarming number of 8.9% versus 7.2% (projected) ringing alarm bells. The big questions is that what has caused massive spending. Border unrest, floods and over spending by government is surely understandable. But the biggest reason for surge in deficit could have been caused by drop in GDP from $ 310 Billion plus to $ 284 billion as reported in the budget and not to forget then Rs/$ parity was 144 to a Dollar against 156.20 (current), which is 9 pct. Above could be the huge factor that may have distorted the budget deficit number.

I wish to remind that in two of my tv talk shows of July 4 & of Sept 5 on AAJ Tv, I have said that inflation will remain in double digit. My views remain unchanged.

While, Governor SBP in one of his press talk earlier spoke of forward guidance. Hence keeping in view of above facts, I see very little room for Policy Rate cut, unless business community have convinced PM IK to intervene and ask SBP to cut rates. In all probability it’s a less likely scenario because I still believe SBP is autonomous body. Unless waver is obtained from IMF, it will be breach of its contract.

Though earlier I was of view that Policy Rate will remain unchanged, which is still valid. But looking at current circumstances I will not be surprised to see a hike of 25 to 50 basis point. I am in favor of 75 pct hike.

However, SBP has a huge task in hand, as it has to reduce government borrowing. While, there is a severe liquid squeeze, mismatches of maturity gaps against long dated bonds needs to be corrected, which means selling of long dated paper.

One way to create interest and demand in market in long dated bonds, Central Bank has to use its monetary tool by adjusting its interest rate corridor by widening Ceiling and Floor rate to 400-500 basis point in line with its recent hike in Discount rate, which is now 13.75%.

Presently, due to liquidity constrain, SBP through its open market operations (OMO) has injected Rs 1.571 Trillion. In its next T/bills auction due on September 25 against maturity of Rs 114 Billion, Target amount is Rs 1 Trillion. While against maturity of Rs 64 Billion coupon, PIB Fixed Target is Rs 125 Billion and Rs 100 Billion is Floater. PIB Auction is due on Sept 18.

Keeping in view the size of OMO & GOP Holdings required to reduce government borrwoings. My estimate is that SBP Profit in current fiscal year will surge beyond Rs 500 Billion. This also means FBR’s Revenue Collection will comfortably surpass Rs 5 Trillion marks.

Further, aggressive bond buying by banks will soon fizzle out when they will realize that inflation in double digit will stay for longer than 2-more quarters, which means based on real interest rate factor and by adding another 3 pct as per past trend, interbank market is potentially not liquidity enough to trade in fixed income paper for sizable amounts.

The current move in bond, as the yield curve has inverted is only in anticipation of rate cut and fear of recession. But market should not ignore the fact that Pakistan’s GDP growth data is flexible and adjustable too. My arguments is based on facts that the Banking sector Deposit/Advance Ratio of last 10 years will confirm that it fell from the highs of 74 pct to 50 pct and is currently hovering around 55 pct. I still do not see the Depo/Adv ratio to pick up in coming months/year.

This is why SBP should immediately start widened the interest rate corridor floor and ceiling gap to take the advantage by widening. Adjusting of NDA and NFA will be another daunting task to manage.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).