BY keeping its key policy rate unchanged at 9.5 per cent from mid-April to mid-June, the State Bank of Pakistan has tried to ensure that return on rupee-denominated assets does not fall to a level where it can lead to speculative dollar buying.

This underlying cautiousness is not without reason: the prospect of future inflows of foreign exchange is not very promising, and significant outflows are inevitable before the close of the fiscal year in June. This will include the $838 million that has to be paid to the IMF. And foreign exchange reserves have depleted due to a huge $2.2 billion debt payment to the Fund. The business community, which had expected, and even demanded further lowering of interest rates, may, however, be disappointed.

The monetary policy statement points out that whereas the above factors had called for caution (which the central bank eventually exercised), other factors, including a big fall in inflation, had created room for “a possible resumption of ease in the policy rate”.

“The SBP action indicates that instead of going for a symbolic policy rate reduction, the room for which was available, as was admitted by the central bank itself, it is rather waiting for the economic situation to be conducive enough by June for a substantial cut,” said the treasurer of a leading local commercial bank.

Between July-February FY13, bank credit to the private sector soared to Rs173.3 billion from Rs56.8 billion in the year-ago period, thereby facilitating a faster growth in large-scale manufacturing (2.9 per cent in 8MFY13 against 1.9 per cent in 8MFY12).

This fact, highlighted in the policy statement, is very heartening, and it shows that the previous monetary policy easing has started paying dividends. Had the central bank gone for a rate cut this time as well, then maybe this trend would have gained more strength. But economics is all about trade-offs.

“Going for a rate cut now would have been like being overly optimistic, ignoring both the obvious and underlying challenges to economic growth,” remarked a former central banker well-versed with the process of monetary policy formulation. “To me, the SBP move and the tone of the monetary policy statement suggest that perhaps Pakistan is preparing to restart borrowing from the IMF.”

But central bankers privy to the exercise of monetary policy review say that the policy statement is but an objective analysis of the current economic situation. “The core issue is about how we will bridge the gap between forex outflows and inflows. Whether to go to the IMF, or survive without fresh lending from it, as we have done in about the last three years, has to be decided by competent authorities,” a central banker told Dawn.

The SBP governor Yaseen Anwar had told the media much before the monetary policy announcement that Pakistan had the capacity to make external debt payments, including those to the IMF, up to June, quite conveniently implying that it should not put undue pressure on the exchange rate.

“Now, if the monetary policy statement speaks of concerns beyond FY13, keeping in view the current external sector scenario and a near absence of any major inflow in the near future, then that’s just it. We shouldn’t read too much, or too little, into it,” said a senior executive of a foreign bank.

But he also pointed out that the recent tapering in the growth rate of home remittances (down to 6.35 per cent in July-March FY13 from 21.45 per cent in July-March FY12), and a sudden spike of 45 per cent in monthly trade deficit in March after a long interval “have actually added a new dimension to these concerns”.

But executives of foreign exchange companies link moderated growth of remittances to a tightening of the Know-Your-Customer regime in US-based banks to block ‘terrorist financing,’ and a revival of construction activities in Dubai. They added that part of the money that Dubai-based Pakistanis would have sent back home have instead been invested into residential and commercial projects over there.

“But remittances from places like the UK, Saudi Arabia, Abu Dhabi, Bahrain, Kuwait and Australia have increased in a big way. I’m sure the growth in remittances would be faster once we have a new elected government in place, and if exchange companies are brought at par with banks (in terms of incentives),” said an official of Exchange Companies Association of Pakistan.

As for a big spike in the trade deficit in March, several bankers link it to the fact that a lesser-than-feared depreciation in the rupee, despite $2.2 billion in external debt payments, had led many importers to import a little more than their requirement, anticipating that an ‘overdue correction’ which might have soon sent the rupee to new lows.

The SBP move to keep its policy rate intact for the second time in a row (after February), has both tactical and strategic considerations. Tactically, it is better to wait a little longer for the most opportune time before going for rate slashing, to make a big impact on the economy. That is what the central bank seems to have done this time.

“Strategically, when you’ve got to make a tough trade-off between the economic situation allowing space for a rate cut, and challenges to economy calling for a cautious approach, then it’s wiser to exercise restraint and watch markets’ behaviour for a while,” advised a senior central banker.

After maintaining its repo rate flat at 12 per cent for a long time (between October 2011 and June 2012), the SBP had reduced the rate to 10.5 per cent in August and then to 10 per cent, before finally cutting it down to 9.5 per cent last December.

“The slashing of the rate in August after 10 months was seen by markets as a sign that the policy rate easing is well thought out, and that the central bank means business (in promoting lower interest rates and bolstering the economy). As a result, banks’ lending rates declined substantially, the stock market responded very positively, corporate profits went up, industrial growth picked up, and the economy got a shot in the arm,” said a leading stockbroker.

“The point is this: can broad monetary policy objectives be achieved by chopping the policy rate intermittently on feeble indications of downward inflationary pressure, or by a sizable and well-timed cut in the rate? I guess the latter is the case, and that is what the central bank is probably doing,” he said, before adding that the unchanged policy rate would have little or no adverse impact on stock trading.