SBP in no mood to revive economy

On Spread of Corona Virus in first Q of CY 2020, fear and panic are in control everywhere and we’re navigating blind as no one truly knows how long this is going to last, let alone what the full consequences are going to be.
Traders around the world including Pakistan are under immense pressure as the virus is showing no sign of letting up for the time being since. The head of the World Health Organization chief Tedros Adhanom Ghebreyesus has said it is impossible to tell when it would peak globally. This has created recession like environment after Asian and US recession during last two decades of 20th Century.
In this environment when all the central Banks have brought their interest rates to bottom, SBP has cut its key interest rate only by 75 basis points to 12.50 per cent on 17th March 2020, the first reduction in four years, just as a gesture of Kindness to the people of Pakistan and not with the mood to revive economy of Pakistan. They have done so by adding 7% financing for installation of new industries and 3% loan to hospitals on their buying of equipments for treatment of corona virus patients. However these two measures are not part of revival of Pakistan economy with official GDP growth rate of 3% (independent sources estimates are 2.5%) and inflation at 12% (independent sources estimates are 15-16%). Pakistan at least needs 5% GDP growth rate to fight against poverty.
Commenting on this rate cut, Former chairman of the All Pakistan Textile Mills Association Gohar Ejaz has said the rate cut “will have no impact on business activity.” “This is very disappointing. We needed this [policy rate] to come down to single digits. Rest of the world is taking drastic actions and we have taken a negligible step.”
Contrary to SBP, the US Federal Reserve has done its second emergency rate cut in a week to blunt the economic impact of the corona virus fears turning in to a prolonged recession. The US Federal Reserve on 15th March 2020 has slashed borrowing costs to almost zero – its second emergency cut in less than two weeks. Its NY branch unveiled another $500bn in cash injections to boost liquidity. 15th March move “raises the question of whether the Fed has anything left in the tank should the spread of the virus not be contained”. The Bank of Japan joined in on 16th March 2020 by saying it would ramp up its bond-buying program. In another joint action coordinated with the European Central Bank, Bank of England, Bank of Japan, Bank of Canada and the Swiss National Bank, the Fed has moved to counteract global “dollar funding pressures”. New Zealand’s central bank has cut its rates by 75 basis points to 0.25pc, while the Reserve Bank of Australia pumped more money into its financial system. South Korea and Kuwait both lowered rates, while Russia and Germany are throwing together multi-billion dollar anti-crisis funds.
Along with human causalities, financial stocks have plunged 9.6pc, leading declines among the major S&P sectors. Energy stocks tracked a 10pc slump in oil prices, while technology stocks slid 7.2pc. Apple Inc, Inc and Microsoft Corp together lost nearly $300bn in market value. MSCI’s gauge of stocks across the globe shed 5.66pc and the pan-European STOXX 600 index lost 4.82pc as stock markets pared initial deeper losses. On Wall Street, the Dow Jones Industrial Average fell 1,643.96 points, or 7.09pc, to 21,541.66. The S&P 500 lost 177.67 points, or 6.55pc, to 2,533.35 and the Nasdaq Composite dropped 519.56 points, or 6.6%, to 7,355.32. Almost nothing was left unscathed. Shanghai shed 3.4pc after the release the scale of the crisis was laid bare by data showing Chinese industrial production for January and February shrank 13.5pc, the first contraction in around 30 years. Tokyo ended 2.5pc lower, after a rally sparked by the Bank of Japan’s support measures announcement fizzled. Sydney’s stock market led losses in Asia-Pacific, tumbling 9.7 per cent in its worst single-day drop on record. The Pakistan Stock Exchange is slipping day by day and sooner its 100 index would plunge below 30,000 as traders continue to face uncertainty amid the novel corona virus health crisis. For an economy already in the midst of a slowdown, further downsides are apparent.
Airlines are among the biggest losers after slashing capacity, with British Airways-parent IAG crashing 27pc and Lufthansa off by 12pc. The car sector also slid as manufacturers Fiat Chrysler, Peugeot-Citroen and Renault said they were halting some if not all production.
Oil prices continue with their nosedives as a price war between major producers Saudi Arabia and Russia has added to sliding crude demand caused by the virus. Price of Brent crude has tumbled more than 10pc. Brent North Sea oil has also plunged more than 10pc to a four-year low, as WTI fell below $30 per barrel.
The ongoing drag on the services sector from social distancing policies and shock from the fall of the oil price on the energy sector is enough to tip the world into recession.
Overall the business Volume is low with volatility on the higher side, and the ultimate losers are hard-working folks.
To counter the alarming situation SBP should again call its meeting and at least bring its policy rate to 10%. Secondly the beneficiaries of Benazir income program and Ahsas program should be given support by increase of their payments 100% for the next three months of this FY. It may be noted that still after 8 month of this FY, 1/4th of the funds allocated for these program have been used and finally like Govt of Sind a fund to support unemployed persons be created by Federal Government and all provincial Governments. ADB has promised to extend $ 50 million in this regard. Further Pakistan can also contact World Bank and IMF to get funds in this regard.

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