More of the same

The decision by the State Bank of Pakistan to stay the course of monetary tightening by jacking up the policy rate by another 100 basis points to 17 per cent has come as no surprise to the markets. That, however, is not to say it is the right decision. The central bank has been pursuing the mirage of monetary tightening for at least 14 months now, lifting the policy rate from 7.0 per cent on September 20, 2021 to 17 per cent on January 23, 2023. Over this period, year-on-year CPI inflation soared from 9.0 per cent in September 2021 to 24.5 per cent in December 2022. If the intent of the central bank in steadily hiking policy rate was to anchor inflation or dampen inflationary expectations, it has worked like a charm gone awry: we have seen the policy yield the exact opposite of the intended outcome. Clearly, it is not working. Of course, the SBP governor knows it, and he also knows that things are pretty much the same in every major economy of the world.

The Monetary Policy Committee (MPC) in its latest statement does speak of an increase in the downside risks to the baseline growth outlook for this year on the back of monetary tightening among other things, but it goes ahead and hikes the policy rate nevertheless. Given that our baseline growth projection is barely adequate to offset population growth, this may mean the central bank is prepared to see an economic contraction – as long as it contributes towards a lower current account deficit, helping the government keep external sector payments in check. This seems to be a compulsion of our flimsy foreign exchange cover – as do the central bank’s rather arbitrary administrative curbs on LCs – knowing full well that import compression achieved through these measures is equally disrupting our exports. Simultaneously, Finance Minister Ishaq Dar’s rather misplaced emphasis on the value of the rupee continues to drive remittances into the black market. The SBP governor has said Pakistan has already settled $15 billion out of the $23 billion it has to repay in external debt repayment – including $6 billion through rollovers and $9 billion repaid – still leaving Pakistan to worry about $8 billion. He said the authorities were looking to whittle this amount further down by $5 billion in rollovers, which would still leave the government to secure financing to the tune of $3 billion before the fiscal year is out.

The SBP governor has voiced his hope that Pakistan can steer clear of default through the current fiscal year that ends on June 30, 2023. This is an example of the short-sighted policy approach taken by the managers of our economy, operating from crisis to crisis but never having the courage to tackle the chronic underlying ills of the economy. This approach has gotten us where we are today, and more of the same is unlikely to help us pull out of the rut. It is likely that the MPC stopped short of a more substantial hike in view of the socioeconomic disruption such a move is likely to cause, leaving the whole exercise neither here nor there in terms of its corrective potential. Inflation is likely to stay its course notwithstanding this nominal policy rate hike, and likely to be further fuelled by gas and electricity price hikes just round the corner. Nor is the move likely to help the authorities mend fences with the IMF, who incidentally holds the key to Pakistan’s access to global financial markets. On balance, the MPC’s latest meeting looks very much like an exercise in futility, leaving it to the economic managers to think outside the box to jumpstart the stalling engine of real growth.