Pakistan’s Monetary Policy Management: Hot Money and High Policy Rate

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The State Bank of Pakistan has announced the first monetary policy, for the year 2020, as expected due to the higher rate of inflation, the policy rate has been maintained at 13.25 percent. In this regard, the debate on ‘Hot Money’ has been started in Pakistan. The economic experts are of the view that due to these hot money inflows the debt carrying capacity of the nation will be affected very badly. As it’s clear that the high level of investments in the treasury bills is coming at a faster pace, due to a higher level of policy rate (rate of interest) set by the SBP (State Bank of Pakistan). According to the SBP, Pakistan has received a record of $536 million in foreign investment in short-term treasury bills (T-bills) in a single day on Thursday (Jan 16). It is expected that investment in t bills may reach $2 billion by the end of the current fiscal year 2019-20. For many economic experts, this kind of investment will definitely affect Pakistan’s long-term economic perspective. The repayments of these treasury bills will create issues for a weak economy like Pakistan. And Pakistan’s economy may get trapped into the worst debt trap than Egypt.

The foreign investment has been increased due to the government’s simplified tax regime for foreign investors. The rupee-based investments have been made in the Pakistan Investment Bond through the treasury bills for three to twelve months and three to twenty years. Most of the investment is happening in the short-term treasury bills. This means in the coming few months, the repayments are expected to take place. This thing is somehow worrying for many economists and a lot of criticism has already been made. But with this all criticism, it is pertinent to mention that the total part of foreign investment in these treasury bills is only 3.8 percent.

Interestingly while doing this criticism, the difference between Egypt and Pakistan’s economic situation has been ignored. The base of the criticism is one aspect, which is the high policy rate set by the State Bank of Pakistan. Now if we see the other side of the picture, it tells us a very different story. The situation of Egypt was worse than Pakistan’s. At that particular time, Egypt had borrowed around 15 billion dollars from the IMF (International Monetary Fund) and almost 30 billion dollars from the other nations in the form of treasury bill investments. This means their total debt all of sudden increased to 45 billion dollars. And the Egyptian economy wasn’t in the position to repay the loans, so the higher rate of interest has been maintained for a longer period of time. The situation is totally different in Pakistan, the rate of interest although is not increasing now. One way or another it has to be accepted that, although the process of stabilization has proved to be very hard for the economy of Pakistan, to some extent, the things have been settled. The free float exchange rate regime has settled the depreciated exchange rate. People are not using the dollar to earn income. The exchange rate is not the source of income. The current account deficit has been declined. There was a surplus of seventy billion in the month of October 2019 after almost a gap of four years.

Another clear difference is in petroleum product prices. The petroleum prices have been subsidized in Egypt. Whereas in Pakistan, petroleum prices are no more subsidized, they are linked up with the international market. On the other hand, due to the controlled current account deficit the rise in international petrol prices can also be countered by Pakistan.The position of the fiscal and energy mess in Egypt was very bad. It cannot be compared with Pakistan.

Pakistan doesn’t need heavy adjustments like Egypt. The price to cost ratio was 85 to 90 percent in Egypt, whereas in Pakistan it’s not this much high. Although the electricity prices have been increased in Pakistan, these are 25 percent of adjustments, made in Egypt.

The biggest problem Egypt faced after going into an IMF programme was high inflation. The headline inflation peaked at around 30 percent with food prices as high as 40 percent at a point. Pakistan is not going through this kind of inflation. Although the price levels are increasing, they are not increasing at a rapid pace. It’s expected that in the coming month’s inflation may decline. The food prices can be controlled with the help of better administrative skills. The initial phase of the economic stabilization program has been completed; the economic contraction has been done with a faster phase. Now is the time for the central bank policymakers and the government is to look into the matter of economic growth. Hot money inflows will not hurt in the long run if the nation is on the pathway of economic growth. In the past, Pakistan has remained involved in many structural adjustment programs and failed to achieve the desired target of economic prosperity. The reason behind these failures is the weak post-crisis management situation. Historically Pakistan always managed to come out of the crisis, but due to weak political and administrative will again get it self-caught in the crisis. It is expected that this time the situation may get change, otherwise, the dark clouds on the economy will become darker.

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