1. The largest head in the budget for FY-22 is markup payments on domestic debt which consumes roughly 33% of the budget
2. The market payments are dependent on the policy rate which is decided by State Bank of Pakistan (SBP). Higher the policy rate, higher would be the market payments
3. Current policy rate in Pakistan very high. It is 28 multiples of the policy rate in United States and 14 multiples of the policy rate in Thailand, 3 multiples of Jordan, 3.5 multiples of Philippine. It is highest of the entire South Asian nations
4. If policy that if policy rate of Thailand was adapted by Pakistan, the country would be able to save about 2500 billion rupees
5. At the policy rate equivalent to Thailand, Pakistan would be able to save 2500 billion which are sufficient to enhance the defense budget by 25% and all other budget heads by 75%
6. This means the total fiscal space of the budget is sufficient to allocate reasonable amount for every budget head, however, the largest chunk of it is eaten by markup payments and as a result the fiscal space for all other locations become very stressed
7. The SBP who is responsible for deciding policy rate, mentions inflation in its policy statements as the most important reason for such a high policy rate.
8. The SBP assumes that higher policy rate can lead to lower inflation; therefore, policy rate is kept high to reduce inflation.
9. In practice we see no advantage of the hike in policy rate in form of reduction in inflation. Whenever the policy rate is increased, the inflation also goes high indicating that the hike in policy rate to reduce inflation is actually counterproductive
10. The global evidences are also supporting the view that higher the policy rate is associated with higher inflation. For example, in United Kingdom, the policy rate in 2019 was 0.7% and inflation was 1.7%. After the spread of pandemic, the policy rate in UK was reduced to 0.1%. After this reduction, the inflation also went down to 0.4%
11. Having a policy rate of less than 1% means making the markup payment irrelevant. The nations who have policy rate less than 1%, they have very small markup payments despite having very huge debt to GDP ratio
12. The world has abandoned the practice of increasing interest rate to reduce inflation. New Zealand who is the pioneer of inflation targeting framework, has abandoned this practice and is currently following the quantitative easing for its own monetary policy. UK, Brazil, Thailand are other example of countries following QE despite having legal framework inclined with inflation targeting
13. The SBP is still insisting on high policy rate as a tool to reduce inflation. Due to fear of high inflation the SBP is refusing to reduce policy rate
14. As stated earlier, only by reducing policy rate, every budget head can be enhanced by 75% making it possible to provide relief to entire nation
15. As mentioned in the monetary policy statements, the main reason for keeping policy rate high is to control inflation, but prima facie there’s no success on this front and this huge allocation of 2,750 billion does not achieve its objective
16. When the entire nation is passing through a crisis period, such a huge allocation for markup must be properly justified and must be evaluated in terms of its usefulness
17. Unfortunately, there is absolutely no evaluation of the monetary policy available at the website of SBP. Instead of this there are several papers on the website indicating that the monetary policy is counterproductive. One of those papers is written by an IMF staff member and another paper is written by a SBP’s own staff member
18. In presence of papers indicating counterproductive-ness of the monetary policy, still using the tool of high policy rate without any evaluation is a very serious negligence having cost in trillions for the entire nation
19. For example during 2018-19, the domestic debt increased by 14% and the markup payment by 82%, posing an extra burden of 1000 billion to the national exchequer. This happened due to the hike in policy rate
20. Despite this huge increase in markup payment aimed at reducing inflation, actually inflation went up. This means the additional payment of 1 trillion have been counterproductive
21. If the SBP thinks that there was any benefit of the policy rate hike in 2018-19, it must be documented and there must be some evaluation report but unfortunately as said earlier there is no evaluation report available at the SBP website.
22. During the covid many nations reduced the policy rate drastically to the level much below the rate of inflation. This resulted in negative real interest rate. This was necessary to boost the economic activities. For example in UK, the inflation in 2019 has been 1.7%. After the start of pandemic UK reduced the policy rate from 0.7% to 0.1% yielding a huge negative real interest rate
23. Despite this huge reduction in the interest rate there was no rise in inflation in the UK and the inflation during 2020 has been much less than 2019.
24. There are many other moves by the SBP which are against the global practices and causing huge damages to the ex-checker
25. For example, all advanced countries relied heavily on Central Banks borrowing during the pandemic and the public debt in UK increased by 20% during pandemic because the government borrowed extensively from the central bank to support the covid relief packages
26. On contrary during the same period Pakistan has been repaying the Central Bank debt by bothering some commercial Banks.
27. Central Bank borrowing is practically and interest-free borrowing for the government because the markup paid on this debt goes back to the national ex chequer. Replacing this debt by the debt borrowed from commercial banks would redirect the markup payments to the commercial banks and the exchequer would be deprived of a huge payment
28. This move is also justified by saying that the objective of returning the debt to SBP is to reduce inflation and despite this huge repayment there was no reduction in inflation.
29. Like the policy rate, SBP is having no evaluation of the policy to return the SBP loan.
30. The SBP and the Debt Coordination Office of Ministry of Finance adapted the policy of converting the short term debt into long-term debt. The long-term debt carries higher interest rate compared to the short term debt, therefore additional trillions of rupees were made to be paid to the commercial Banks
31. Needless to say that there is no evaluation of this policy, as is the case for the other policies
32. The SBP is custodian of the financial affairs of the Country and the fate of entire nation depends on the decisions of SBP for example if SBP was opting the policy rate of United States the government can save 2.6 trillion out and this amount is about six multiples of the entire expenditures of civil government
33. SBP must be must justify its policy decisions and must present and evaluation report of the decisions that has been taken
34. In case of absence of any such evaluation report the SBP must be held accountable for providing loss of trillion of rupees to the national ex checker