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‘UNEXPECTED’ DECISION: SBP MAINTAINS INTEREST RATE, BUT WHY?
Profit
Friday, 15 September, 2023 I 28 Safar, 1445
DOES CENTRAL BANK REALLY EXPECT INFLATION TO DECLINE SIGNIFICANTLY OR HAS ACCEPTED THAT RATE HIKES NO MORE EFFECTIVE?
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PROFIT
UROOJ IMRAN
N a move that defied expectations, the State Bank of Pakistan’s (SBP) Monetary Policy Committee on Thursday decided to maintain the benchmark interest rate at 22 percent. This appeared to be quite unexpected; analysts polled by Profit as well as other publications prior to today’s meeting were majorly of the view that the SBP would hike the interest rate by 100200 basis points (bps). After all, inflation still remains high despite declining from a record 38 percent in May. And global oil prices have been on the rise. However, the SBP appeared to be confident that inflation would continue to decline, especially in the second half of FY24. In the monetary policy statement released after the meeting, the central bank said the impact of high oil rates was being passed on through adjustment in administered energy prices, agricultural outlook had improved, and a recent crackdown on smuggling of essential food items and illegal foreign exchange trades had “begun to yield results”. “As such, real interest rates continue to remain in positive territory on a forward-looking basis,” it stated. [According to Investopedia’s definition, the real interest rate is the observed market inter-
est rate adjusted for the effects of inflation. What exactly does this mean? Let’s say the interest rate offered by a bank on your deposited savings is 20 percent. If you kept Rs 1 lakh in that account, at the end of the year, you would have Rs 1.2 lakh. However, the annual inflation that year was 21 percent. This means that while the amount of money in your account increased, in real terms, you could buy less with that money because the cost would be Rs 121,000. This means the real interest rate was negative. If the real interest rate was positive — let’s say 23 percent — then you would have had Rs 123,000 at the end of the year.] Positive real interest rates encourage people to keep their money in banks as it protects them from inflation. So, raising the benchmark interest rate to a point where the real interest rate is positive means less money is going towards purchases, which decreases demand — one of the primary tools a central bank uses to curb inflation. The SBP has raised the interest rate by 12.5 percentage points since April, mainly citing rising inflation. However, it decided to maintain the policy rate at the MPC’s last meeting in July and has stuck to its stance despite market expectations to the contrary. This means one of two things — either the SBP governor and the MPC truly believe that inflation will fall below 22 percent, or they (or
Govt grapples with dollar crunch to buy oil amidst pending syndicated financing g
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whoever else influences the policy) believe there is little use in raising the policy rate as it will not control inflation. During the post-MPC analysts briefing, SBP officials asserted that inflation would decrease significantly in the second half of FY24, due in part to the high-base effect. In response to a question, Governor Jameel Ahmad also said the MPC had factored current global oil prices as well as projections while making a decision. “One particular factor taken into account was forward-looking inflation in the next 12 months and [we] tried to keep real interest rates positive.” This shows the SBP’s confidence. It was a “very bold decision”, according to Yousuf Saeed, head of research at Darson Securities. “Today’s decision will boost market confidence. However, we need to keep an eye on energy prices (fuel, gas and electricity),” he commented. While inflation may continue its downward trajectory, will it fall below 22 percent and real interest rates become positive? “SBP believes that inflation will remain in check despite rising oil and power prices and real interest rate will be positive … We believe there is a high risk that inflation may remain higher than the SBP estimates due to rising global oil prices and adjustment in energy prices in Pakistan,” read a note by
Topline Research. Topline also revised its estimate for average annual inflation in FY24 to 23 percent from 21 percent previously. This is slightly higher than the SBP’s estimate of 20-22 percent. Sajid Amin, deputy executive director at the Sustainable Development Policy Institute (SDPI), termed the SBP’s decision “risky”, saying the central bank may have taken it based on “ad hoc” measures such as the recent crackdown which led to the rupee’s appreciation and a reduction in the prices of food items including sugar. If inflation won’t come down, then why has the SBP not raised the interest rate? It may be because the governor and the Monetary Policy Committee believe that inflation cannot be controlled by simply hiking the interest rate. Fahad Rauf, head of research at Ismail Iqbal Securities, commented, “I think it is a fair decision, given that there are no signs of an overheating economy, and a rate hike would have yielded little benefit in terms of curbing cost-push inflation.” In an economy like Pakistan’s that does not work on heavy borrowing, raising the interest rate would only lead to increasing the working capital of businesses, which would then pass on the effect to consumers. This is known as cost-push inflation.
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ECC emphasizes PIA’s privatisation instead of restructuring
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WITH GOVT HOLDING 92% STAKES, AIRLINE’S FINANCIAL WOES HAVE BEEN CAUSE FOR CONCERN
PROFIT
MONITORING DESK
Pakistan’s caretaker government is facing a multifaceted financial challenge as it seeks to secure dollar loans for the import of petroleum products. As per reports, at the heart of this issue is the potential $3.3 billion syndicate financing deal with the Islamic Development Bank (IsDB), which may come at an interest rate exceeding 10 percent. These developments are unfolding against a backdrop of surging global petroleum prices and dollar scarcity. With limited dollar reserves, the government is exploring the option of approaching the Kingdom of Saudi Arabia (KSA) to extend the deferred oil payment facility, which is set to mature in December 2023. Up to August 2023, KSA disbursed $600 million, with an additional $400 million anticipated by the year’s end. Pakistani oil companies consistently purchase $100 million worth of crude oil monthly, with invoices sent to Saudi authorities, who subsequently transfer funds to the Government of Pakistan. The Ministry of Finance has also consulted with leaders in the domestic oil industry, who have recommended pursuing the IsDB’s $3.3 billion syndicate loans from 2023 to 2025. The reason behind this recommendation is that IsDB’s terms may be more favorable compared to the prevailing interest rates in both domestic and international markets. Out of the total $3.6 billion financing allocated by IsDB’s International Trade and Finance Cooperation (ITFC), $300 million came directly from IsDB and the remaining $3.3 billion was intended to be arranged through syndicate financing from international banks. However, it appears that commercial banks are showing greater interest in investing in international bonds rather than contributing funds to syndicate financing.
PROFIT MONITORING DESK
The Economic Coordination Committee (ECC) of the Cabinet has directed that the government prioritize the privatization of Pakistan International Airlines Corporation Limited (PIACL) over restructuring. This decision comes as PIACL grapples with a mounting debt burden, operational challenges, and a bleak financial outlook. PIACL, a state-owned entity, has been struggling for years to remain financially viable in the face of intense regional competition, internal management issues, and an inability to secure funds for fleet expansion. It is learnt that with the government holding a 92% stake in the airline, its financial troubles have been a cause for concern. As of December 31, 2022, the airline’s debt and liabilities reached a staggering Rs 743 billion, surpassing the total value of its assets. Operational losses for the last financial year alone stood at Rs 11 billion, contributing to total losses of Rs 86.5 billion. If PIACL’s financial situation remains unad-
dressed, projections indicate that its debt and liabilities could skyrocket to Rs 1,977 billion by 2030, with annual losses reaching an unsustainable Rs 259 billion. Previous efforts to ensure the airline’s sustainability, such as cost-cutting measures, internal management improvements, and government capital injections, have not yielded the desired results. In June 2023, the government initiated a restructuring effort based on recommendations from the Dubai Islamic Bank Consortium Report of 2017. In a pivotal decision, the ECC has shifted the focus away from restructuring and toward the privatization of PIACL. The Ministry of Aviation has been tasked with collaborating closely with the Privatization Commission to expedite the privatization process. To facilitate this move, the Aviation Division has been instructed to establish a technical committee. This committee will be responsible for devising a concrete action plan to address PIACL’s outstanding liabilities and ensure a smooth transition to privatization.
Outgoing CJP sanguine about polls on time ISLAMABAD
STAFF REPORT
Chief Justice of Pakistan (CJP) Umar Ata Bandial on Thursday said there was an explicit directive in the constitution about elections within 90 days of dissolution the assembly, expressing the hope the upcoming elections would be held within the constitutionally mandated timeline. The outgoing CJP was addressing a dinner organised in his honour by Supreme Court Bar Association (SCBA) resident Abid S. Zuberi. Reflecting on the court’s performance, he stressed the importance of law enforcement and acknowledged that reducing the backlog of pending cases was a priority. The efforts in the past year yielded some results as two thousand cases were disposed of. However, he admitted that this fell short of satisfactory performance and expressed the hope that he will be remembered for his contributions after he doffs his robe. CJP Bandial also emphasised that decisions do not belong to one individual but to the entire organisation. He commended the judges who showed courage in their judgments, as well as the young lawyers who presented their arguments before the court. He underscored the importance of strong bar councils in ensuring a robust judiciary, urging unity among the Supreme Court and high court bars. CJP Bandial also touched on the issue of suo motu notices, mentioning PTI leader Babar Awan’s request to take notice of President Arif Alvi’s tweet regarding contentious bills. He stated that the court had avoided taking suo motu notices in such situations. “Babar Awan saheb made a passionate speech…I thought he would appear before the court with a petition. Perhaps he might submit an application in the future.” Lamenting the wastage of the court’s time due to other cases, CJP Bandial reiterated the importance of upholding the constitution and ensuring that repeated cases did not come before the court. He further vouched for the courage and independence of the judges in both the high courts and the Supreme Court, assuring the public of the judiciary’s autonomy. Referring to his own restoration after the Lawyers’ Movement fifteen years ago, he referred to himself as the “last dinosaur to return to the judiciary.” “I used to recite a poem 15 years ago during the movement.” ‘Short-and-sweet address’ In a light-hearted moment, he referred to his greetings that had made headlines, saying that he wanted to offer a “good to see you” to the participants and promised to keep his address “short and sweet.” He emphasised that judges and lawyers relied on the judiciary to resolve numerous pending issues and urged the public to have faith in the rule of law, hoping that the judiciary would continue to move forward unitedly. It may be recalled that the CJP in his previous speech had expressed disappointment over some incorrect reports published about him, ruefully recalling that phrases, such as “good to see you” and “short and sweet,” were taken out of context. However, he had said that he held no grudges against the media. CJ vacates residence Meanwhile, the outgoing CJP has vacated the Chief Justice House and moved to a house reserved for retired judges. CJP-designate Justice Qazi Faez Isa is set to take the oath of office on September 17. The Islamabad Police have provided security to the nominated CJP in accordance with the law, appointing a chief security officer accordingly.
Massive POL price hike on cards amid currency, global oil fluctuation PROFIT
NEWS DESK
Pakistanis may soon experience a massive uptick in petroleum prices later this week due to currency fluctuation and changing global crude rates. As per reports, petrol and high-speed diesel (HSD) prices could escalate Rs10-14 and Rs14-16 per litre, respectively, for the next fortnight of September. Kerosene prices are also expected to see an increase of Rs10 per litre due to existing tax rates and import parity prices. During the first ten days of September, the Pakistani rupee experienced a free fall in open market by depreciating to a historical low of Rs325 against the US dollar. The local currency depreciated by Rs 4.5, moving from Rs299 to Rs304 in the interbank market, before subsequently stabilizing below the Rs300 mark. Meanwhile, bench-
mark international Brent prices rose to over $92 per barrel in the second week of September, compared to $88 in the first week of the same month, which has impacted the overall price dynamics. In addition to these factors, the government plans to pass on to consumers approximately Rs 0.88 per litre impact from the recently approved increase in sale margins for petroleum dealers and oil marketing companies (OMCs) by the Economic Coordination Committee (ECC) of the cabinet last week. Based on Pakistan State Oil’s (PSO) product imports, the import parity prices for petrol had increased by Rs13, for diesel Rs14, and for kerosene oil Rs10 per litre, since September 1. However, retail prices are estimated to rise by Rs13 per litre for petrol, Rs16 for diesel and Rs10 for kerosene. Jet fuels are also expected to become somewhat costlier, with an increase
of Rs10 per litre. As a result, petrol and diesel rates may exceed Rs320 and Rs325 per litre, respectively, while kerosene prices could approach the higher end of the Rs240 per litre with effect from September 16, 2023. This potential increase in petroleum product prices follows a notable 27.4% rise in the August inflation rate, which may have a delayed effect on general prices in Pakistan in the coming weeks. Currently, there is zero general sales tax (GST) applied to all petroleum products. However, the government imposes a petroleum development levy (PDL) of Rs60 per litre on petrol, as well as Rs50 each on HSD and high octane blending component and 95RON petrol to meet one of the condition of the IMF. Additionally, customs duties ranging from about Rs18 to Rs22 per litre are applied to petrol and HSD.