OPINION
Uzair Younus
The SBP’s rising credibility issue
more quickly than previously forecasted as demand-side pressures wane faster due to the Finance (Supplementary) Act.” The SBP has also changed its position on the inflationary impact of the budget in recent months. In July 2021, the central bank argued that “the FY22 budget is expected to be broadly inflation-neutral as most tax rates have been left unchanged.” In the January 2022 statement, however, the central bank argues that “the enactment of Justifying its actions has taken a the recent Finance (Supplementary) Act, 2022 represents significant toll on the central bank additional fiscal consolidation compared to the budget and has lowered the outlook for inflation in FY23.” The central bank’s contradictory language is not the only issue he State Bank of Pakistan has a growing credibility here. The SBP governor argued in a television interview that the problem. For the past several months, Pakistan’s mini budget will “give a contractionary impulse of around 1 percent central bank has been chasing an elusive inflation of GDP.” The central bank’s presentation also made a similar point, target. While justifying an evolving near-term policy showing that the primary deficit would decline by about 0.5 percent stance, ranging from dramatically ramping up rates of GDP. This is an interesting point to make, mainly because the to justifying negative real interest rates, the SBP has finance minister has argued, both in parliament and outside, that the consistently argued one thing: medium-term inflation is likely to mini budget’s withdrawal of tax exemptions was about documenting decline to a range of 5-7 percent. In addition, the SBP has gone from the economy, not taxing the citizens of Pakistan. arguing that the 2022-23 budget was inflation neutral to arguing The central bank’s latest inflation outlook also conveniently that the recently passed mini budget has lowered the inflation ignored the fact that “the seasonal decline in CPI during December is outlook. a well-established phenomenon, attributable to arrival of fresh winBelow are some quotes from the SBP’s Monetary Policy Stateter crops of vegetables and fruits.” It also ignores that the wholesale ments with regards to its medium-term inflation outlook: price index is on a tear, indicating that inflation is not likely to modJanuary 2020: “The MPC also viewed the current moneerate for the foreseeable future. Add to this the fact that folks who tary policy stance as appropriate to bring inflation down to the keenly follow the agriculture sector are warning of missed wheat medium-term target range of 5 – 7 percent over the next six to eight outputs and a negative impact of fertilizer shortages; meanwhile the quarters.” monetary policy statement does not mention this risk and the central January 2021: “As a result, inflation is still expected to fall bank’s presentation argues that “agriculture input conditions broadly within the previously announced range of 7-9 percent for FY21 and remain supportive for sowing of Rabi crops.” trend toward the 5-7 percent target range over the medium-term.” A poorer than expected wheat output is not only likely to July 2021: “As a result, inflation is still expected to fall within increase inflation, but also increase pressure on imports and by the previously announced range of 7-9 percent for FY21 and trend extension the current account deficit – global commodity prices are toward the 5-7 percent target range over the medium-term.” stubbornly high and the ongoing crisis in Ukraine is likely to add January 2022: “However, during FY23, inflation is expected fuel to the fire. But somehow this is not a risk as far as the SBP is to decline toward the medium-term target range of 5-7 percent concerned. Some may argue that the medium-term target, which the SBP has been chasing since at least January 2020, has been unattainable due to supply-side shocks caused by the pandemic, which have led to cost-push inflation around the world, including Pakistan. That is a fair argument. However, if this argument The writer is Director of is true, then one must ask: why is the central bank arguing that “demand moderating measures are gaining the Pakistan Initiative traction and have improved the outlook for inflation?” at the Atlantic Council, a As the above quotes from the central bank show, the SBP has been chasing an elusive medium-term Washington D.C.-based inflation target. During this process, it has evolved its policy positions drastically, using various means to think tank, and host of justify its policy response. It almost seems as if the bank makes a decision and then goes to find reasonable the podcast Pakistonomy. justifications for its actions. While the justifications may make sense in isolation, reading the bank’s historHe tweets @uzairyounus. ical statements makes one scratch their head. We are all dead in the long-run, and perhaps the SBP’s logic is that those reading its statements closely will all die before they can ask the SBP about when it is going to finally achieve its medium-term inflation target. n
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