Consumer Confidence Index
The conclusion that CPI has peaked since 2022 at 96.2 January-March 2025 against 88.1 April-May 2025 (with 100 defined as neutral benchmark and a score below indicative of consumer pessimism) was reached. Two observations are in order. First, there is a need to clarify whether there was any hint of influence or coercion used to measure three-month data against only two months, especially as the calculation was not of key macroeconomic indicators that may have provided useful ins and outs for the budget formulators. And secondly, while the score remains under 100 which indicates pessimism as opposed to optimism yet it would be interesting to get clarity as to why the 8 percentage point improvement is being highlighted at a time when the budget itself is being dismissed by many an economist as lacking realism.
Be that as it may, the consumer sentiment was premised on four indications: (i) household financial situation; (ii) macroeconomic situation; (iii) unemployment; and (iv) household savings. And this makes the claim of an improvement in sentiment baffling as the household financial situation remains a source of concern for those employed in the private sector as pay has been frozen or at best raised at less than the rate of inflation for the past five years — a condition which excludes the 7 percent of the country's total workforce employed by the government budgeted each year to receive a pay rise higher than inflation at the taxpayers' expense.
The macroeconomic situation has improved as growth was in the positive realm in the outgoing fiscal year; however, it must be borne in mind that the country's foreign exchange reserves remain hostage to 16 billion-dollar rollovers with China reportedly agreeing to 1.8 billion dollar rollover but resistant to reschedule concessional loans, preferential buyers credit, and credit from Export Import Bank of China. While our rupee-dollar parity remains remarkably constant yet there are growing concerns that the International Monetary Fund may seek a more stringent condition than a differential between the market and the interbank rate.
Unemployment is above 20 percent according to independent economists and household savings largely banked in the National Savings Centre are projected in the budget 2025-26 to fall from 164 billion rupees in 2024-25 to 141.2 billion rupees next fiscal year. This is due to the expected reduction in the discount rate which, in turn, an expectation that has led to a massive containment of mark-up payments — from 54.5 percent of the total current expenditure as per the revised estimates of 2024-25 to a commendable though unrealistic 50.3 percent in 2025-26.
To conclude, sentiments do respond to market conditions but are susceptible to change at a moment's notice as was evident in 1997 Asian Financial crisis. In Pakistan the State Bank of Pakistan routinely conducts business sentiment surveys, quoted in the Monetary Policy Statement which for the past year has been claiming that business sentiment has improved and will fuel productivity; however, the large-scale manufacturing sector (LSM) index has remained in the negative realm for the past three years. Surveys have their own relevance in all countries but there is a need to align market sentiment with key LSM data in Pakistan for greater credibility.
Copyright Business Recorder, 2025
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Business Recorder
4 hours ago
- Business Recorder
SBP's over-cautious and lopsided monetary policy
In their August 2024 published article 'Understanding the international rise and fall of inflation since 2020' in the 'Journal of Monetary Economics', three writers from the Research Department of International Monetary Fund (IMF), and one other highlighted two reasons broadly that are apparently at odds with the otherwise policy prescription from both IMF through its extended fund facility (EFF) programme, and by 'Chicago boys'-styled local policymakers. Hence, while the research paper, which is based on data from 10 advanced economies and 4 emerging economies, saw broadly the role of external factors in driving up inflation, and that the secondary cause in the shape of monetary policy needed lesser usage in terms of tightening given such shocks had mostly influenced core inflation; that does not include the food and energy components, and in turn highlights the advanced impact of such shocks that have come through as secondary impacts after first influencing inflation that in turn is captured by more volatile measure of inflation in the shape of overall consumer price index (CPI). The paper points out in this regard: 'Our results strongly suggest that global drivers, especially the sharp movement in energy prices, played a dominant role in driving the international rise and fall in inflation since 2020. Local policies also played a role. First, the transmission of headline shocks to underlying inflation was shaped by local characteristics. …However, our estimates suggest that the role of relative price shocks and their pass-through into core has at this point largely faded, facilitating the convergence of inflation to target-consistent levels. The continued stability of long-term inflation expectations on average across economies is also facilitating the return of inflation to target.' It is important to note that both the IMF and the SBP remained overly cautious with regard to monetary policy stance even though nothing significant has been transmitted in terms of global oil prices – which have mostly remained low relative to the highs seen during the early phase of Russia-Ukraine conflict, and mostly stable in general over the last number of months – and tariffs that were first announced in early April, and continued to remain paused most time since then, with the likelihood of being tapered down in general for most trading partners of United States, including for Pakistan. Yet, such relative easing of inflationary impact – both evidenced from the paper cited above, for instance, and the fact that monetary tightening has already run a lot of course, squeezing immensely aggregate demand for many months – continues to be met by unwarranted caution from both IMF and SBP. Hence, in their most recent country report on Pakistan that was released in May, which indicated that 'Monetary policy should remain tight and data dependent to ensure that inflation stays moderate, within the SBP's target range', and the latest monetary policy released in July 30 by State Bank of Pakistan (SBP) also surprisingly saw 'global oil prices' as 'volatile', and 'the impact of global trade tariffs as uncertain' and, in turn, kept policy rate well above both the CPI, and core inflation rate. The most shocking part is that mainly aggregate supply related causes like 'higher than anticipated adjustment in energy prices' are also being seen by SBP as grounds for involving the role of policy rate! Such over-cautious approach by IMF and SBP has already cost the economy dearly – average economic growth over the last few years of around the population growth rate of between 2-3 percent has already pushed significant number of people below the poverty line, while absolute numbers close in close to half of the population now below it as per recent World Bank figures in this regard, while unemployment rate is running very high when compared with numbers traditionally. The extent of over-caution by SBP can be seen from the fact that while inflation during the last eight months, that is during November 2024 to June 2025 has averaged 2.6 percent, policy rate has not come down in a way as to keep positive real interest rate in any reasonable limits, which as compared with June CPI numbers stands at 7.8 percent, and at 4.1 percent for the same month when compared with core inflation (non-food, non-energy). Hence, the decision to keep policy rate unchanged at 11 percent is surprising to say the least, and to say that it should have come down considerably, and well back in time is an understatement, and that is even after factoring in the role of base effect, not to mention the primarily aggregate supply side nature of external factors, and domestic energy price adjustments. The reason it is an understatement is because policy rate should not have gone up so high in the first place in response to considerable rise in inflation in recent years – before inflation started to come down – because in developing countries like Pakistan, and especially in the wake of Covid-19 pandemic, inflation is at least equally a supply-side/fiscal phenomenon. SBP as per its January 28, 2022 amended 'State Bank of Pakistan Act, 1956' is mandated 'to achieve domestic price stability by way of regulating the monetary and credit system' as its 'primary objective', it also carries the role to see its contribution towards 'supporting the general economic policies of the Federal Government to foster development and fuller utilization of the country's productive resources.' In that sense, a question that needs a plausible answer is whether an over-cautious approach of SBP – both under over-board austerity minded successive IMF programmes in general, including the current EFF programme, and similar mindset reflected by SBP outside of these programmes as well — where it has over-utilised the instrument of policy rate at the back of wrongly seeing the over-board need to restrict aggregate demand, when clearly there is a strong footprint of aggregate supply side factors in determining inflation can be seen both traditionally, and especially in the wake of Covid-19 pandemic, and in an overall world of existential threat of climate change crisis. It can clearly be seen that the mandate of SBP is not just price stability, but it also has the secondary concern to target inflation in a way that allows economic development, and utilisation of 'country's productive resources'. Clearly, an over-board monetary austerity mindset, in turn, unnecessarily squeezing the aggregate demand and not placing enough emphasis on improving institutional factors on the aggregate supply side — like fixing economic institutional quality, and improving productive—, and allocative efficiencies of underlying organisations, and markets through bettering governance, and incentive structures, including regulation — has allowed the endeavour of price stability to unnecessarily result in excessive economic growth sacrifice, along with producing only short-term reduction in inflation, with secondary impacts feeding into inflation in terms of higher transaction costs, and greater inflationary built-up cost-push inflationary channel at the back of lack of aggregate supply-related focus. More broadly, protecting fiscal space, especially in the wake of heightened geopolitics related security, and greater climate change/SDGs/economic resilience related spending needs in recent times require lowering the debt burden for instance, and SBP's overcautious and lopsided approach to rely too much on policy rate to control inflation is not allowing it to play its role for overall economic development. In this regard, while the independence of SBP needs to be protected, yet greater say of government needs to be reflected through greater footprint of government in the monetary policy committee (MPC) of SBP, in addition to filling MPC with more broad-based economic thinking in terms of economic ideological representation; it appears the neoliberal-minded influence, both traditionally and currently, seems to be in majority in terms of most members of the committee apparently showing strong signs of following this school of thought, as reflected through the overall arguments in monetary policy statements in general, including the latest one. More perhaps could be learnt from the workings of Monetary Authority of Singapore (MAS) in this regard. A mind-set of shock therapy has not helped the economy. What is needed is adopting both macro- and micro-level initiatives in a more focused and innovative way. Excessive market power – for instance in the case of sugar sector – resulting in price gouging or, in other words, dealing with 'greedflation' or 'seller's inflation' requires adopting a more balanced aggregate demand, and supply side focus. External factors influencing inflation also need to be taken in the same balanced way. For instance, noted economist Isabella M. Weber along with her co-authors, in their (2025) published article 'Implicit coordination in sellers' inflation: How cost shocks facilitate price hikes' point towards the need to make microeconomic policy interventions at the sectoral level to deal with cost-push inflation that results from seller's inflation. The paper pointed out in this regard, 'we provide descriptive evidence in support of the hypothesis that economy-wide cost shocks function as implicit coordinators for price-making firms to hike prices, which translates supply shocks and commodity market fluctuations into price increases across sectors. In the absence of coordination, price-making firms risk losing market share when they increase prices. But economy-wide cost shocks signal to all firms that this is the moment to increase prices and thus coordinate pricing while the window of opportunity is open. If supply constraints occur in addition to cost shocks, that can further strengthen the coordination signal.' Moreover, the research paper recommended, among other things, the following: 'First, measures should be taken to reduce price volatility in critical upstream sectors to prevent economy-wide cost shocks in the first place… Greater regulation and oversight, sector investigations, and antitrust enforcement in too-essential-to-fail sectors can further help contain sharp price increases. Price controls can be an emergency measure of last resort, if other stabilization efforts fail. Second, policy measures can be implemented to impose a potential cost on firms that excessively hike prices in response to cost shocks.' This provides one way that rather than seeing an otherwise wrongly over-board role of interest rate as a policy instrument to control inflation, for instance, sector specific price controls can be adopted. Another way, as a complimentary step could be to adopt 'dual-track' pricing system as adopted by China during the 1980s, for instance. Copyright Business Recorder, 2025
Business Recorder
5 hours ago
- Business Recorder
Discount rate remains unchanged
EDITORIAL: The Monetary Policy Committee (MPC) under the chairmanship of Governor State Bank of Pakistan Jameel Ahmed decided to keep the discount rate unchanged at 11 percent. This has surprised many, given the macroeconomic data routinely released by government entities in recent weeks and months. Consumer price index (CPI), or headline inflation, reported to be the prime determinant of the discount rate, has been declining since November 2024 — from 4.9 percent, to 4.1 percent in December, 2.4 percent in January, 1.5 percent in February, 0.7 percent in March and 0.3 percent in April. The MPC reduced the discount rate to 13 percent on 16 December, 12 percent on 12 January and 11 percent on 5 May even though the decline in CPI was much sharper during these months than previously. True that CPI rose to 3.5 percent in May and declined to 3.2 percent in June this year; however, the rate has been kept unchanged since May, indicating that the CPI may not be the primary determinant of the discount rate. Core inflation has also been steadily declining since March this year — from 8.2 percent to a low of 6.9 percent in June. The Monetary Policy Statement (MPS) noted that high frequency economic indicators were depicting a global economic recovery (and not just in Pakistan) — a stance that is clearly at odds with the International Monetary Fund (IMF). According to the IMF, 'forecasts for global growth have been revised markedly down compared with the January 2025 World Economic Outlook (WEO) Update, reflecting effective tariff rates at levels not seen in a century and a highly unpredictable environment.' The MPS further claimed notable year-on-year growth in automobile sales, fertilizer off-take, credit to private sector, imports of intermediate goods and machinery — sales and purchases that are not indicative of higher output, but a decline in inventories while post-Trump's inauguration the dollar lost value against all major currencies except the rupee, which accounts for lower import costs. The MPS makes reference to purchasing manager's index in recent months for the first time which begs the question as to how it is calculated. One may assume that it is part of the technical assistance (TA) extended by the IMF to Pakistan to deal with 'important shortcomings that remain in the source data available for sectors accounting for around a third of GDP while there are issues with the granularity and reliability of the Government Finance Statistics (GFS).' The September IMF documents note that the TA will support government efforts to improve GFS and formulate a new Producer Price Index. It is relevant to note that Business Recorder was informed by the Pakistan Bureau of Statistics that the TA began in July 2025 and will not be completed till end June 2026. The MPC appeared to be unaware of the fact that the large-scale manufacturing (LSM) growth was at negative 1.52 percent July-April 2025 (the most recent data released) against 0.26 percent in the comparable period of the year before; private sector credit rose from 323.5 billion rupees in 2023-24 to 676.6 billion rupees July-June 2024-25 with the rise associated with the stock market rather than the LSM. And maintained that barring flood-related risks agriculture sector is expected to recover in the current year — a risk that compromised the target last year and the recent ongoing floods may well belie this optimistic projection. In relation to the discount rate decisions taken by the MPC it is appropriate to cite the observation by the IMF in its May 2025 documents uploaded on its website titled the first review under the extended arrangement: 'while the reduction in headline inflation has been impressive, core inflation remains elevated, and the SBP should continue to calibrate monetary policy carefully, removing monetary constraint gradually and contingent on clear evidence that inflation is firmly anchored within SBP's target range'. In other words, the decision to remove monetary constraints on repatriation of profits under contractual obligations (in spite of reserves on 18 January cited at USD 14,456.6 million though the Governor SBP noted during his press conference that rollovers account for USD 16 billion) may be the primary reason for the Fund staff not to give the green light to the MPC to reduce the discount rate. The Governor SBP held a press conference after the MPC meeting, which must be appreciated as it is in line with the Fund recommendation to undertake effective communication 'as it will help the public better understand the MPC's reaction function and build support for policy decisions.' Sadly, it is fairly obvious that he failed to convince the naysayers in the industrial community that the decision to keep the rate unchanged was an appropriate one. The central bank seems to have taken a cautious approach with a view to ensuring price stability amid a surge in energy prices that has worsened the inflation outlook. Copyright Business Recorder, 2025
Business Recorder
5 hours ago
- Business Recorder
‘SBP's decision to maintain 11pc interest rate harmful to growth'
KARACHI: Syed Aman Shah, Provincial Convener of the Awaam Pakistan Party Balochistan, has strongly criticized the State Bank of Pakistan's decision to maintain the policy interest rate at 11.0 percent, calling it detrimental to the country's economic growth. He stated that regions like Balochistan, which are already facing significant socio-economic challenges, are being pushed further into crisis by this excessively high interest rate, which negatively affects industrial, agricultural and business activities. Syed Aman Shah emphasized that with the Consumer Price Index (CPI) now reduced to 3.20 percent, there is no justification for keeping the policy rate at such a high level. He said this wide gap leads to increased business costs, restricts access to finance, and demoralizes the private sector across the country. He reiterated the clear demand of the Awaam Pakistan Party: the policy rate must be cut by at least 600 basis points to improve the investment climate, reduce the cost of doing business, and promote exports. Highlighting the local context, Syed Aman Shah said that small and medium enterprises (SMEs) in Balochistan are already struggling due to poor access to finance and lack of infrastructure. A persistently high interest rate only deepens their crisis and restricts opportunities for growth and job creation. He urged both the federal government and the State Bank of Pakistan to urgently review the monetary policy and make decisions that reflect on-ground economic realities, so that a path toward inclusive development and national prosperity — particularly for underserved regions like Balochistan — can be ensured. Copyright Business Recorder, 2025
