Daily Times

“The business community hailed the one percent,” said a news item. Obviously they should hail the one percent; after all, they are the one percent. Humour aside, this one percent does not refer to the recently, internationally coined term to classify the super rich who control the global economy by its jewels. The particular news headline went on to clarify that the businessmen were hailing the Central Bank’s decision to cut the policy rate by 100 basis points. This particular action of the Central Bank must have some significant consequences for the country to warrant headlines across all the print media; albeit no idea how it fared with the electronic media because, ever since the surgeon general issued a health warning on the latter, “news channels are capable of making putty out of the mind and senses”, channel selection on the idiot box has been limited to those showing movies only. That being said, a quick quiz: how many are aware of what the policy rate is? And for those who raised their hands, confident that they have an answer, here is another doozy: why is it called basis points, is it not simpler to just say percentage? This could be an international currency to use complicated jargon to further confuse the common man about a subject that no one understands anyway.

This time around, motivated to solve the mystery, the monetary policy statement (MPS) was downloaded and subjected to a detailed reading; the things an author must do for his readers. At the outset, reading the MPS is one of the most challenging activities, probably comparable to watching the grass grow on the golfing greens, even for an accountant. Dear readers, a word of caution: while all attempts have been made to keep this write up palatable for the layman, there are certain inherent limitations specific to the subject that cannot be simplified. For instance, what exactly is a monetary policy? While there is a plan to subject monetarism to a theoretical critique some day, for the moment, suffice it to say that is what the Central Bank gets paid for.

Getting to brass tacks, the policy statement notes that Consumer Price Index (CPI) inflation and its expectations continue to follow a downward trajectory and, moreover, considerable foreign exchange inflows have contributed in maintaining an upward trajectory in foreign exchange reserves. Excellent news! So when everything is moving towards good, the layman would retort: why change? Shortly thereafter the layman might deduce that lower interest rate, forgetting whatever that policy thing is, means even lower inflation, right? Unfortunately, no, that is not what a lower interest rate does. Pursuant to some economic theory, a lower interest rate will generate economic activity and is hence an inflationary policy action that invokes a rather disturbing realization: the Central Bank wants to increase inflation. Why?

These economists are crazy! How can one percent decrease in interest rates, forgetting inflation for the moment, drive economic growth? If the rich could see profit in any venture they would surely not have stopped short for a one measly percent, and vice versa. The MPS does also observe that there is a slowdown in credit growth due to weak corporate profitability. Is there any empirical evidence that a policy rate change, in the past, ever had the desired effect on the economy, notwithstanding that any such study will ab initio have an uphill task correlating the impact, if any, on the sizeable, according to most estimates, undocumented economy?

On the other hand, one percent is a huge margin for the speculator in the stock market but speculative trading does not impact the real economy and it would be strange for the Central Bank to cajole speculation, so that cannot be the reason. The MPS somewhere states that government is the biggest borrower from banks now, and its cost of debt financing is going up; so that is it: the lower rate will reduce the government’s borrowing cost. Why did the Central Bank not say that in plain English? After all, we are all patriotic Pakistanis and will welcome any step that favours the government.

Whatever the reasons for the one percent, rest assured the cost of house loans and car loans for the common man are definitely not coming down. The banking industry will dream up some additional charges so as not to spoil the masses. After all, the rate can go up again and it is better that small borrowers are insulated from such temporary shocks. On the other hand, the banks will immediately reduce the return on deposits by one percent. How a reduction in the deposit rate promotes saving is a mystery and without savings where the money will come from for investing is an even bigger mystery. Since the masses generally have their small savings in bank deposits, a popular decision would be to increase the deposit rates and reduce the interest rates on house and car loans. Then again, economic theory never made sense. If the masses are not benefitting, then who is? Obviously, those hailing the decision!

The MPS goes on to paint a dismal picture about the trade deficit. Imports are down because of the huge decline in oil prices but exports are down as well due to fall in commodity prices internationally, especially cotton, which continues to be the backbone of our exports. The Central Bank recommends that exports should be increased but does not clarify or offer any suggestions as to how. Fortunately, Pakistani workers across the globe continue to do their bit, without which the balance of payment might have gone haywire. For those who do not even know what the balance of payment is, welcome to the club of the many! And the worst news is that, apparently, tax collections are down, which is very strange since the salaried class is paying even more taxes. The only conclusion is that the rich are paying even fewer taxes.

After all of the above, the author, and most likely almost all of the readers, came to a disturbing conclusion: it is impossible for the common man to figure out whether or not changes in policy rate have a material impact on the national economy and, further, the monetary policy is beyond comprehension. One can only hope that the best man is on the job. One thing is rather puzzling: while the position of the governor of State Bank is arguably as technical a post as the finance minister, considering that one handles the monetary policy and the other the fiscal policy, the latter is an elected known personality and the former is selected and generally kept outside the limelight. Why?

The writer is a chartered accountant based in Islamabad. He can be reached at syed.bakhtiyarkazmi@gmail.com and on twitter @leaccountant