Jamshaid Mohsin
DISCOUNT rate has been lowered in previous monetary policies and same has been maintained in recent monetary policy i.e. 7%. This strategy is probably at the insistence of leading economists, proposing to adopt credit expansion policy with anticipation that GDP and employment may prosper. Previous practice of SBP has been in compliance of Keynes theory i.e. raise discount rate to control inflation and vice versa in other words, SBP had been correlating its discount rate with inflation with negative correlation. Yet this time, quite in contrast, it has disregarded rising inflation, flickering between 8.5-9.5%, while formulating its recent monetary policies.
We should learn from implementation of similar strategies of Quantitative Expansion (QE) by other countries in the recent past. Just ponder, why in 2008, economic recession broke out? The answer is, convenient credit was made available and it was misapplied into speculative businesses, real estate, stocks & securities. Unfortunately, Inflation is taken as one of the factors of GDP figures, so it often keeps economists in false optimism, same happened here, QE increased inflation which was obviously taken as good omen of economic activity until it ended into increased unemployment, a double jeopardy, stagflation (a situation of increase in inflation and increase in un-employment too). Ultimately, real estate and stock market collapsed from over-valued pricing and consequently banks faced insolvency. A global chain effect initiated, as US Dollar has pervasive effect on global economy. Of course, in this crisis, some frauds were also held responsible, yet that was also due to fact of reckless lending on weak collateral systems. In the recent past again, 2012 onwards, USA is reverted to policy of the Quantitative Easing (QE) or TWIST(a buzzword attached to this strategy), by lowering interest rates and hence pumping cash into the economy. So far, this again seems to have failed to ease unemployment instead it is leading economy into stagflation. Social riots and unrest are, in fact, indication of unemployment frustration.
There is false belief that rise or fall in stock exchange indicates rise or fall of country’s economic conditions. We get optimistic about economic conditions by rising stock market index and vice versa, taking stock exchange as significant economic factor is very risky self-contentment, it is easy to manipulate, for window-dressing of sick economy under the carpet, arguments are, (1) Stock Exchanges are manipulated, specially small ones like ours, PSX, the brokers and other players here, do market-making tricks (2) Stocks trading is speculative business, price gains are non-productive transfer incomes, in this business just exchange of shares takes place, no goods are produced, no value addition is made and no employment is generated, (3) Governments in order to show economic performance, divert their resources of intellectual planning, money, to improve this indicator, the stock indices, PSX(KSE)100. Influential stock traders whose living depends on speculative business in bourses also lobby and exaggerate it as significant KPI of good economic performance, (4) More than 90% manufacturing is done by SME sector, which is not represented in Stock Exchange.
So from above experiences of Quantitative Easing (QE), it can be inferred that QE alone does not bear fruits as anticipated rather it harms the objective in the long run. We need to shun gauging economy by Stock Exchanges. Instead, our economy managers need to pay heed to support base, create conducive business environment for the productive and innovative industry. I am not proposing that lowering the interest rate is mistaken step in anticipation to improve economy, yet I assert lowering interest rate ALONE is fatal. Because, the easy credit is misapplied, to luxuries, personal leasing, to speculative businesses like, investment in real estate and stocks. So it is advisable that this treatment ie, lowering the interest rate to enable investment, should be complemented with strong control on credit rationing (a function of SBP, Credit control, is being overlooked by them), so that funds are directed properly to economically productive sectors like manufacturing, value addition, exports of goods and services. SBP should realize its role essentially; its compliance section should develop SOPs to monitor credit rationing. Credit Rationing is essential function of Monetary Policy being overlooked by central bank since long. Commercial Banks and NBFIs are very vulnerable to deviate credit rationing for their business volume. If Credit Rationing is not monitored people will borrow personal leases, instead of productive work, and ultimately will be insolvent and pass insolvency to banks. In addition to monetary policy, Government should pay heed to the Fiscal Policy as well, our corporate tax rate is too high, 30%, which needs to be rationalized, especially to motivate exporters. Corporate business should be encouraged by minimizing legal hurdles to generate respectable skilled and educated employment.
—The writer, an Investment Analyst, contributes occasionally to national dailies.
