THE State Bank decided to keep interests steady in its latest monetary policy announcement after a year of continuous decreases. The decision reflects prudence in face of a divided outlook on inflation.

International factors such as oil prices have a relatively benign outlook, but domestic pressures on food prices could emanate from factors such as floods and an upward revision of power tariffs, both of which are highly sensitive elements in the CPI basket.

The decision is a cautious one, and the caution is indeed warranted.

Take a look: SBP announces monetary policy, discount rate stays at 6.5pc

This is the first monetary policy statement of the new fiscal year, and what it has to say about the budget and the new fiscal framework is important. The fiscal deficit for the last fiscal year ended July 2015 came in at 5pc, according to the statement, which is appreciably higher than the target set at the start.

More significantly, the statement adds that liquidity support provided to banks rose sharply, with outstanding Open Market Operations going to an “all time high” of Rs 1.03 trillion.

For next year, meeting the deficit target depends critically on collections under the controversial Gas Infrastructure Development Cess says the SBP, pointing out that next year could be equally challenging.

On the external front too, the SBP appears to applaud the growing import coverage but cautions that revival of private inflows and exports remains critical. The quality of growth registered in the previous year looks less edifying on a closer look, since much of it appears to have centred around construction, mining and quarrying. Private-sector credit growth as well as investment declined compared to the previous year.

The statement contains a line that is beginning to look like a ritual incantation more than a statement of economic merit, saying “decline in lending rates is expected to revive private investment going forward”.

This hope has been invoked for a long time now by the SBP and it’s time that we started hearing more about why the hoped for revival in private investment is not materialising in spite of sustained interest rate declines.

At the end of the day, the SBP performs a high-wire act by noting the weaknesses in the economy without going into any detail about their causes and nature.

Sentiments in the economy remain positive and upbeat, but sentiments are a poor foundation for growth. The SBP can still do more to help point that out.

Published in Dawn, July 27th, 2015

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