Will State Bank of Pakistan cut the discount rate?

Governor State Bank of Pakistan (SBP), Ashraf Mahmood Wathra is scheduled to unveil Monetary Policy Decision at a press conference on Saturday. There are mixed opinion of groups due to each having its own vested interest. The commonsense is not likely to prevail as those responsible for making decision are likely to take refuge behind external and internal dictate.

Based the economic indicators the SBP should announce reduction in discount rate to: 1) facilitate private sector borrowing, a must for accelerating GDP growth rate, 2) emulate the develop countries adamant at easing monetary policy for combating prevailing global economic slowdown and 3) reduce cost of borrowing, as the Government of Pakistan (GoP) remains the biggest borrower.

Many economic analysts say that the rule of thumb that higher rate of interest fuels inflation is hardly applicable on Pakistan. The country suffers from cost pushed inflation. The factors like global prices of food and energy products, cost of doing business, electrify and gas outages and above all precarious law and order situation erodes competitiveness of local manufacturers and exporters.

While there are expectations that the SBP will cut the discount rate by 50 basis points, few cynics still believe that the central bank is likely to opt for maintaining status quo. This perception is based on the mantra that spreads of commercial banks are shrinking.

Since commercial banks are the biggest investors of Treasury Bills, Pakistan Invest Bonds and Government of Pakistan Ijara Sukuk there is pressure on the central bank not to cut the discount rate.

As against this sponsors of highly leveraged companies like sugar, textile and cement (also enjoying access to power corridors) are putting pressure on the government to reduce the discount rate. Business of the companies belonging to the above stated sectors has thrived only because of the crutches of the government support.

One may recall that the Government recently approved payment of Rs13/kg subsidy, amounting to Rs6.5 billion on sugar export to facilitate mills owned by the politicians (treasury as well as opposition members).

The retired persons and widows also wish that the central bank should not cut the discount rate further as the return being paid to them by the banks as well as on national savings schemes at present is negative keeping in view the rate of inflation in the country.