Download State Bank of Pakistan’s Monetary Policy Statement June 2013 – SUMMARY

State Bank of Pakistan’s Monetary Policy Statement June 2013 –
Discount Rate down to 9%
SUMMARY
 SBP elected to lower the discount rate by 50bp to 9.0%, a level last seen in July
2006, in its MPS on June 21, 2013.
 SBP cited a continuous and broad-based decline in inflation coupled with below
potential GDP growth and the need to encourage private investment as the key
drivers of its decision to cut rates.
 SBP’s decision indicates confidence on IMF support. While entering an IMF program
is generally associated with monetary tightening, not easing, media reports suggest
Pakistan is angling for a “Rapid Credit Facility” which comes with limited
conditionality.
STATE BANK OF PAKISTAN TRIMS RATES BY 50BP TO 9.0%
The State Bank of Pakistan (SBP) elected to lower the discount rate by 50bp to 9.0% in its
latest Monetary Policy Statement (MPS) on Friday, June 21, 2013. This brings the
discount rate back to a level last seen in July 2006, extending the SBP’s current monetary
easing streak to a total of 500bp over the last 23 months (300bp in FY13 alone). SBP
cited a continuous and broad-based decline in inflation coupled with below potential GDP
growth and the need to encourage private investment as the key drivers of its decision to
cut rates. Effectively sidestepping the two challenges highlighted in SBP’s previous report(1) external account pressure and (2) fiscal financing – the Central Board of Directors of
SBP has changed the policy direction and slashed discount rate to 9%, down 50bps. The
SBP placed more weight on declining inflation (5.1% CPI reading in May’13) and the need
to spur growth, highlighting reported improvement in general sentiments following the
results of general elections last month in which PML (N) secured a majority in the
parliament, giving hope of improved political stability ahead.
This move has indicated to the visiting IMF delegation that government will not pursue a
hawkish approach while obtaining the $5 billion loan package. The new government is
business friendly and therefore reduction in the discount rate will foster the business growth
and will have a positive impact on the country economy as it will support private business.
Previous government raised the domestic borrowing to more than 60% of the GDP thereby
showing that they were not able to fulfil their fiscal responsibility and as a result the finance
minister has announced that they will not borrow any money from state bank this year
thereby bringing down the domestic loan to GDP ratio.
The SBP has left the deposit rate unchanged to 6% which will be fairly penalizing for the
banks. SBP said it placed a higher weighting on moderating price pressure and lower
private-sector credit relative to balance of payments position. With the decline in discount
rate, the valuations of several leveraged companies will become attractive particularly for
Cements, Textiles and Oil companies. Banks, on the other hand, will have to bear the brunt
of lowering spreads and hence, their profitability will be affected by a mere 5% or more.
The central bank has quite rightly not lowered the ceiling over PLS deposits and kept it at
6%. Developments to follow are that china will provide $1 billion budgetary support and
three IMF installments worth $263 million are due to be paid on June 28.
RATE CUT ALSO INDICATES SBP CONFIDENCE ON IMF SUPPORT…
Recall despite steadily softening inflation, the Central Bank held rates unchanged in the two
MPS (February and April 2013) post its last 50bp rate cut in December 2012, citing
concerns on the fiscal and external accounts. SBP directly attributes Friday’s decision to cut
rates to attaching higher weight to declining inflation and low private credit off take relative
to risks to the balance of payments position.
Reading between the lines though would suggest relatively higher Central Bank comfort on
the BoP given both, (1) as stated by SBP, a noticeable uptick in sentiments post elections
which could positively influence private financial inflows; (2) implicitly, IMF support to
cushion near-term balance of payments risk.
…WHERE MEDIA REPORTS HINT AT SOFT NEW PROGRAM TERMS
Interestingly, re-entry into an IMF program was one of the key reasons why the market,
despite soft inflation (Jan-May 2013 average of 6.6%, May 2013 CPI at 5.1%), was
unconvinced on rate cuts. A possible clue arises from some media reports which cite that
Pakistan is seeking IMF support by an infrequently used “Rapid Credit Facility” (RCF)
which provides rapid concessional financial assistance without explicit program-based
conditionality’s or reviews to low-income countries facing an urgent balance of payments
need. Financing under the RCF carries zero interest rate through 2014, has a grace period
of 5½ years, and a final maturity of 10 years while economic policies under the facility aim
at addressing the underlying balance of payments difficulties in support of the country's
poverty reduction and growth objectives.
IS THIS THE RIGHT TIME FOR CHANGE IN POLICY
The current shift in policy direction is premature. Efficacy of interest rate cut and pick up in
private credit growth is debatable. Other than interest rate, two other stumbling blocks to
pick- up in credit and investment are (1) energy shortage and (2) law & order situation, a
fact acknowledged by the central bank in its statement.
OUTLOOK
As far as the equity market goes, the KSE might receive SBP’s decision positively. Note that
while initial postelection exuberance had started to factor in a potential rate cut in
June/August 2013, view of the same was dampened by (1) recent worsening of FY13E
fiscal deficit position (government estimate at 8.8% of GDP vs. 6.5% earlier); (2) risk of
uptick in FY14E CPI inflation post taxation measures unveiled in the budget and (3)
looming return to the IMF fold.
The move is unlikely to create any major stir in the money market, where the yields have
slipped 23-32bps since the last policy decision in April’13 with major drop after elections.
The rate cut also shows government’s intentions to borrow from banks in form of T Bills
and PIBs. The Rate cut will also help The Government lower its interest expense.
Still what closely needs to be monitored is that the government has given a deadline of the
second week of August to eliminate the circular debt amounting to around PKR 500 billion;
this will be done through issuing of government papers. This increase in money supply will
eventually put pressure on inflation numbers, thus forcing the central bank and the
government to increase the discount rate in coming months.
Compiled by Raza Tabish Farooqui - Member, Audit & Assurance Sub Committee, ACCA
Pakistan Members - Network Panel.
DISCLAIMER
All opinions, recommendations and suggestions expressed in this document are based on
the input from the Audit & Assurance subcommittee of the ACCA Pakistan – Members
Network Panel.