KARACHI: It is hard for ordinary people to fathom out the intricacies of monetary policy anywhere. The relationship between the cause and the effect is complex and the time lag in application of monetary tools and achievement of targets is wide; too complex and too wide for the folks to keep a well-differentiated track of the cause and the effect.

For Pakistanis, the stress of everyday life hardly spares them enough energy to bother about understanding the macro-management of the national economy. The situation is more challenging for two reasons: one, often the traditional economic wisdom that defines relationships between key indicators does not hold ground in the country for a variety of factors; and, two, it is politics and not merit that influences the choice of the set of policies adopted by key economic institutions and the arguments given in defense are at best flimsy.

The low level of documentation and the undeniable reality of a huge parallel economy confuse even the professionals. For instance, retail, education, transport and eateries have posted tremendous growth over the past five years when the average GDP growth has been the worst in 50 years. The corporate sector reaped rich profits and the capital market beat all previous records to perform better than most parts of the world. Besides, the credit has become cheaper by a huge 400 BPS in the last 15 months, but the credit off-take by the private sector continues to be depressed.

The disconnect between the public and the pundits further retards the process of democratisation of economic policy-making in the country where power structure continues to be elitist in its nature and orientation. The institutions necessary to achieve factor and price efficiency in a market economy are weak and political interference compromise whatever capacity they possess to improve management and to thereby allow the majority to live a better, more productive life.

The ineffective monetary management, therefore, is not an exception. It fits perfectly with the trend. The afterthoughts among the economic managers on the rather defeatist stabilisation slogans that only caused low investment, static wages and unemployment, forced them to change the monetary stance around the middle of the last year.

The critics believe that more than anything, it was the government’s need to reduce the cost of borrowing from banks that had led to the change of hearts at the highest level. The State Bank did not take the decision independently, they argue.

Such experts warn of a gathering storm on the external front. They forward the quick falling of the value of Pakistani currency against the greenback, and the falling forex reserves as indicators of the direction the economy is moving towards. They warn of possibly more stringent conditions the next time the country would go calling at the IMF alter for a bailout.

The high turnover of governors in the State Bank of Pakistan under the current government does lend support to the perception of Islamabad’s interference in the affairs of the central bank. Since February 2008, the central bank has been piloted by four governors – Dr Shamshad Akhtar, Syed Salim Raza, Shahid Hafiz Kardar and the incumbent Yasin Anwar.

Most investment bankers and analysts, however, expect further marginal easing of the monetary policy in the next review which is due later this month. A closer view of the trend of monetary policy changes during the period under review depicts some interesting facts.

The benchmark interest rate was increased from 10.5 per cent in Feb. 2008 to 15 per cent by the end of the year in revisions at odd intervals in May, July and November, probably to reign in galloping inflation. In 2009 the monetary policy was revised five times and the interest rate was lowered to 12.5 per cent though the inflation was on a hike. From January 2010, the revision is made once every two months; six times a year. In 2010 the rate was held for the first half of the year at 12.5 per cent, but raised to 14 per cent by December. It was held at that level till July 2011 after which it started its downward journey to the current 10 per cent; 50 BPS below the level when the democratic journey had started in 2008. The fact that the inflation did come down must not be ignored here. However, its persistent deceleration despite liberal monetary easing is said to be disturbing for the economists. They interpret it as a sign of deepening recession making revival of growth impetus more difficult for anyone.

“Falling rate of increase in the price levels point to a depressed aggregate demand in the country, reflecting an economic slowdown. Low investment, high unemployment, rising uncertainty amid security tensions and limited disposable income of the average household explain the trend,” an expert commented.

The SBP monetary policy might have failed to direct the added liquidity towards private investment, but it did appease the alienated business community to some extent. They not only favoured the trend, but demanded further reduction of the interest rate down to 7.5 per cent to make large-scale investment viable. They claimed that infrastructural bottlenecks and higher business risks in Pakistan could partially be mitigated by the availability of easy and inexpensive credit.

They blamed the reluctance of the commercial banks for low credit off-take by the private sector. The businessmen of KP and Balochistan were more vocal though they listed a host of other factors as well that dissuade the entrepreneurs from initiating and expanding businesses.

Some traders hinted at the existence of other informal networks that cover the credit demand of a segment of business community. Most economists and tycoons, however, blamed the government for crowding out the private sector by raking the loanable funds from the banking sector. The business leaders of Karachi and Punjab articulated the wish-list of the private sector before private investment could pick up pace.

The commercial banks defended their operations that are guided, they said, by their business considerations in the prevailing tough economic environment. “The cost and the risk of lending to the government are comparatively much lower than dealing with private borrowers. As long as we have safe and secure option of lending to the government, I do not think any commercial bank would take interest in private lending,” a banker said while requesting anonymity.

Some middle class Pakistanis mentioned falling returns on government saving schemes as a consequence of the downward revision of the interest rate by the central bank. It hurts families who have invested in these schemes, and there many of them.

“Mostly pensioners and women park their savings in government schemes as it is perceived to be a safe and manageable avenue of investment. The falling rates are a disincentive to the saving habits that are already not strong in Pakistani society,” an official at the Directorate of National Savings said when reached in Islamabad over the phone.