Monetary Policy – Everything is broken up and dances

The call to raise policy rate by State Bank of Pakistan is on, most of the analysts in the market are expecting a 50bps increase, if it happens policy rate will be 14%. The monetary policy committee believes that excess government borrowing creates excess money that increases demand and prices. The economic managers left with no option but to raise rates. The broad money data released for 12 November depicts that government is still borrowing heavily.
But the government on the other side is just ignoring these messages; honestly speaking why they should bother about something which creates income for them. Yes, this is a very important point to understand, the amount of money paid for higher interest to SBP gets back to government kitty as SBP profit. Thus higher the rates means more money for the government, but adopting such a path the government is burdening future generation, weather the government is concerned about the future of our youth or not is your judgment to make.
SBP board have very learned people, they know the cause of higher inflation or hyperinflation thus understands the need to curtail it. Germany experienced hyperinflation in 1929, back than it used to be cheaper to burn Mark for cooking instead of purchasing fuel for performing the same task. We certainly do not want to be in similar kind of state and therefore the policy board is raising rates. After all we are follower of the western model and all our policy makers are trained or educated for running our economy on their disciplines. They are paid for performing this task.

But these disciplines are not working for the west so how can we expect it will work for us. Many will argue that west is different from Pakistan; they are in a mess because of exotic derivatives and as we have no such arrangement we are different because we are follower and we are far at the back in the caravan. If we compare our present situation with the major banks laws since the McFadden Act of 1927, probably we are in 1982 when Depository Institution Act (DIA) was introduced.

This was the time when even US market was not developed enough for fixed income securities complex derivatives was a far cry. Every problem emerges after the Second World War was cured in such a way that inflated the problem. We need to look into their current situation and decide, should we follow them or try to create something that suits us? How? This is something our policy maker will have to find out. I believe our existence is linked with nature, which moves in cycles if we can sink with nature we will have fewer problems. Thus, our payments and receipts or financial system should compliment these natural cycle.

Getting back to the SBP rate decision, September meeting voted 6 – 2 for increasing rates by 50bps, meaning a few members resisted rate increase. SBP decision is expected to be announced at 5:00pm on 29th November 2010, from Lahore.

Riaz Andy
29th November 2010