Alert Sign Dear reader, online ads enable us to deliver the journalism you value. Please support us by taking a moment to turn off Adblock on Dawn.com.

Alert Sign Dear reader, please upgrade to the latest version of IE to have a better reading experience

.

New monetary policy stance may set economic direction

Updated March 14, 2014

Email

- File Photo
- File Photo

LAHORE: Rising rupee and weakening risks to inflation going forward have brought focus back on the next monetary policy statement the State Bank of Pakistan (SBP) is set to announce on Saturday.

Analysts agree that monetary policy will give an insight into the direction the government thinks the economy is moving in. Also, it will provide a ‘measure of confidence’ the government has in the recent build-up of the foreign exchange reserves and the reduction in inflationary expectations.

More importantly, it will indicate how certain the government is about the realisation of the expected foreign inflows in the last quarter of this fiscal year.

“The SBP raised the policy rate by 50bps each in September and November last year on deteriorating balance of payments position and worsening inflation outlook. In January, it held the rate on account of expected reduction in inflation despite risks to the external account on account of uncertain foreign inflows. If the bank takes the same factors into account tomorrow, it should significantly lower the rates,” Shahid Zia, financial analyst, commented.

“If the rate is left unchanged or if the reduction is insignificant, it will betray its lack of confidence in the economic recovery claims of the government in the wake of rising currency.”

Salman Shah, former finance minister, believed the bank would hold the rate at the current level. “Inflation hasn’t come down to a level where the bank gets space to cut the credit price. The IMF will also not like it.”

But he was confident that the rate could be cut in May if inflation stayed down and foreign exchange reserves continued to build up.

The unprecedented appreciation in the rupee value has irked exporters who say it has significantly eroded their competitiveness.

Former Competition Commission of Pakistan (CCP) chairman Khalid Mirza agrees. “The competitiveness of our exporters has suffered a big blow because of the appreciation in the exchange rate. The major victims are the textile exporters who fetch almost 55pc of the export revenues. They need to be provided relief.”

He said the countries with stronger currencies keep the rates down. “The reduction in inflationary expectations and the rise in the rupee value mean that the central bank now has the space to lower interest rates to help exports and cut the cost of doing business.”

Nevertheless, the textile manufacturers, who congratulated the government for historic appreciation of the rupee from 108 a dollar to 98, want immediate 3pc cut in the rates and rebate on exports for the next six months to compensate for their exchange rate related losses.

“The currency stabilisation will enhance confidence in the economy and benefit the common man,” said former Aptma chairman Gohar Ejaz.

Aptma-Punjab chairman S M Tanveer seconded him. But they said the industry couldn’t export inflation and the government should save it as some manufacturers have already closed down operations due to sudden fall in the dollar value.

“The government should announce a compensatory rebate for industry to offset losses due to dip in the dollar value like India and China if inflation is not to be adjusted through currency devaluation,” Gohar said. “The textile industry needs a mechanism for reduction in the cost of doing business through 2.5pc cut in credit cost and decrease in energy prices and inflation.”