0
KARACHI, Dec 4: The State Bank will issue its monetary policy statement for the second half of the current fiscal year in January 2004. It had issued the monetary policy statement for the first half of this fiscal year in July 2003.
Sources close to the central bank say the policy statement is currently being prepared by relevant SBP officials adding that it would be made public after the approval of the SBP board of directors. So it is premature to say when exactly the policy statement would be released.
Banks and bourses are eagerly waiting for the SBP policy statement that would help them frame their own work plans. Says a former chairman of Karachi Stock Exchange Yasin Lakhani:
“Corporate profits have risen primarily due to low interest rates. So they want a continuation of the loose monetary policy stance — and are waiting eagerly for the SBP policy statement.”
The State Bank had last cut its discount rate by one and a half percentage point to 7.5 per cent on November 16, 2002 and has maintained a lax monetary policy stance since then. In one year ending on November 14, 2003 the Karachi Stock Exchange 100-share index rose 70 per cent and the aggregate market capitalization at KSE increased 59 per cent to Rs812 billion.
Senior stock brokers including Mr Lakhani believe that low interest rates had a hand in this remarkable performance of the mother bourse.
After the November 02 cut in SBP discount rate the weighted average yield on benchmark six-month treasury bills has fallen by 4.7 percentage points to 1.65 per cent in one year. Weighted average lending rate all the banks combined has fallen by 3.08 percentage points to 7.58 per cent within first seven months of the discount rate cut i.e. by end June 2003.
In the mean time the weighted average rate of return on bank deposit has also declined 1.97 percentage points to 1.90 per cent in seven months to June 2003. Whereas lower bank lending rates have reduced the financial cost of doing business this very low bank deposit rate has boosted stock prices. So the corporates have doubly benefited due to the SBP lax monetary policy stance.
“Corporates want this policy stance to be sustained,” said Mr Lakhani in a telephonic interview with Dawn.
He said big corporates that frame operational plans keeping in view the monetary policy direction are waiting for the SBP policy statement because that would help them decide what to do — and how to do it. “If the monetary policy is reversed — and interest rates take a spike in its wake — that would frustrate major corporates.”
Mr Lakhani said from the stock market’s point of view it is good if the lax monetary policy is continued with the State Bank monitoring its implementation with utmost care to ensure that “blunders are not committed.” He was obviously referring to the misuse of fixed-income special saving certificates and defence saving certificates by some top corporates and their banks for interest rate arbitrage in the second half of the last fiscal year.
Banks had lent huge funds to the corporates as low rates to buy these certificates and pledge the same again for resecuring loans at still lower rates on the one hand and earn the yield on the security papers on the other. Since the government was the net loser in this game it stopped banks from selling SSCs and DSCs in June 2003.
CHANGE INEVITABLE: Senior bankers and independent economists say a change is inevitable in the State Bank monetary policy.
“The policy cannot be kept unchanged in the second half year of this fiscal year. It has to change,” says economist Dr Qazi Masood. Does this mean that the policy need to be relaxed further or should it be tightened now? “It has become clear now that there is no need to further relax the policy,” insisted Dr Masood during a telephonic interview with Dawn.
“The economy has reaped the benefits of a loose monetary policy,” he said referring to low interest rates and corporate profitability etc.
“But investment is not taking place. The State Bank Governor Dr. Ishrat Husain himself is on record saying he does not know why investment is not picking up,” observed Mr Masood who also teaches at the Institute of Business Administration (IBA).
“We will have to see why investment in Pakistan is not that sensitive to interest rate movements,” said Mr. Masood adding that a slight tightening of the monetary policy seems needed to check inflation. Consumer inflation rose 2.2 per cent in four months to October 2003 on year-on-year basis against a target of four per cent for this fiscal year. But in October alone it moved up 3.5 per cent.
The IMF has also warned Pakistan in its latest country report that the inflation developments need to be monitored carefully even though there is no evidence of immediate pressure.
Dr Qazi Masood says fear of imported inflation rising cannot be ruled out because of phenomenal growth in value of imports — particularly those from the eurozone — in the wake of rising euro. The single European currency has risen to a record high past $1.2 mark.
