ANYBODY looking for surprises in the state bank’s monetary policy announcement was in for a disappointment. The newly minted governor, Ashraf Wathra, delivered the staid announcement in a short, halting delivery that steered clear away from potential controversy regarding the state of the economy.

The picture painted by the state bank in the monetary policy announcement is one of significant improvement in the state of the economy. The lively uptick in the rate of private sector credit offtake is the best indicator that economic activity is undergoing a revival. Going from Rs33 billion last year, private sector offtake of bank credit this year rose to Rs338 billion, with most of the increase accounted for by loans to businesses. Much of the offtake was for financing working capital needs, which is consistent with a picture of idle capacity beginning to stir into motion.

SBP leaves policy rate unchanged at 10 per cent

However, the state bank also acknowledges difficulties ahead in the business environment, pointing out that “risk of loss of investor confidence remains”. It cites a survey done by the Overseas Investors Chamber of Commerce and Industry (OICCI) in March, which showed a dip in the business confidence index after a steep rise in the first half of the fiscal year.

For its part, the OICCI saw nothing unusual in the monetary policy announcement, saying that the state bank appears to have taken a very cautious view. “The status quo has been maintained,” says Asad Jafar, president of OICCI, adding that the policy rate is an important indicator of the central bank’s own outlook on the economy but “not a critical factor for foreign investors” who typically have very long time horizons. “Factors like energy and security play a bigger role” in fostering confidence amongst foreign investors, he added.

But for domestic investors it’s a different story. “The rate should have been brought down to single digits,” says Siraj Kassam Teli of the Businessmen’s Group. If inflation has indeed been contained, as the state bank is claiming, he sees little justification for keeping the discount rate up. “How do you expect to spur investment in this climate otherwise?” he asks, emphasising that further cuts in the discount rate are essential to kickstart the engine of job creation.

Beyond the discount rate, anyone looking towards the state bank for answers to tricky questions concerning the state of the economy is likely to come away disappointed. For instance, the bank mentions the reduction in government borrowing as a positive, even though the governor referred to this year’s revenue target as the biggest risk to the fiscal framework, saying the target is “challenging given that no major tax reform has been introduced in the FY15 budget”.

The governor also noted a “substantial increase in foreign borrowing” since February, going on to say that the resultant inflows have provided much-needed “short-term stability” to the balance of payments. When talking of risks to the external sector, he preferred to keep his words to relatively safe topics like international oil prices and delays in planned inflows for next year, as well as a potentially large oil import bill if the idle power generating capacity is to be restarted.

But little mention was made of the debt servicing obligations being accumulated by the government, something the state bank gingerly cautioned about in the 3rd quarterly report. In addition, the IMF’s 3rd quarterly report shows a scheduled outflow of $2.3 billion during the current fiscal year on account of “maturing short term debt”, which means the debt in question must have been contracted in the last fiscal year. Little is known about this debt, except that in the previous fiscal this amount was $507 million. The same report also shows total external debt coming down by $6 billion in three years from 2010 to 2013, followed by a jump of $6 billion in the one year till June 2014, with an additional $7 billion increase programmed by the end of June 2015.

Given the weaknesses in the fiscal and external frameworks, interest rates cannot be approached with only the question of growth in mind.

For economists like Dr Hafeez Pasha, former finance minister, the state bank is walking a tightrope given the political compulsions it is faced with. Having presented a positive picture of an economic revival in the country, he says, the state bank is then constrained to explain why rates will not be coming down. “So they talk about loadshedding and all these other things” rather than the real constraints that they are responding to. Those real constraints are touched upon, but very lightly.

Published in Dawn, July 20th, 2014