State Bank of Pakistan seems adamant at raising policy rate

According to media reports, Monetary Policy Committee of State Bank of Pakistan (SBP) is scheduled to meet on 16th July 2019 to finalize the hike in interest rate. Keeping in view the recent rhetoric of Governor SBP, analysts have a consensus that there will be an increase of 150bps in the policy rate. This announcement is expected despite analysts terming persistent hike in interest rate ‘detrimental’ for the economy of Pakistan. Analysts say Pakistan’s central bank is following the dictate of International Monetary Fund (IMF) blindly rather than coming up a home grown plan. They fear either the Monetary Policy Committee is ignorant of the dynamics of Pakistan’s economy or it is forced to follow the dictate of the lender of last resort, IMF.

Let us examine the most talked about conspiracy theory, ‘IMF does not want Pakistan economy to flourish”. One tends to believe this theory on the premise that the Fund does not wish to lose one of its prime customers. It will never allow Pakistan to commit default and it also does not want the country enjoying the status of an atomic power to stand on its feet. Pakistan’s persistent dependence on IMF will also facilitate in twisting its arm, as and when its services are required in war on terror. Some cynics even go to the extent of saying that under the prevailing geopolitical scenario, the global and regional super powers wish to keep Pakistan under their thumb to maintain their hegemony in South Asia, Middle East and North Africa.

Examining Pakistan’s economy a little deeper clearly indicates that the country suffers from adverse balance of payment situation, or in the simplest words country’s exports are not enough to finance imports. While quantum of remittances is close to exports, quantum of imports is phenomenal. In the imports, energy and food bills have the highest percentage. Only the economic managers could be held responsible for high energy and food import bill. The country has been failing miserably in boosting indigenous production of crude oil and gas. On top of that pilferage of electricity and gas are colossal, which goes on with the connivance of employees of electricity and gas distribution companies. The inefficiency is also evident from persistently rising circular debt, as the government has been failing in removing the root cause of circular debt, theft.

Policy makers have been failing in boosting exports. The local manufacturers have been witnessing erosion in competitiveness because of ever rising cost of doing business, the main reasons being high interest rate and electricity and gas tariffs. Lately, Pakistan has attained the status of wheat exporting country, but a substantial quantity is still smuggled to Afghanistan. On top of that nearly 20% of total wheat goes stale before reaching the market due to an acute shortage of modern grain storage silos. Similarly, Pakistan produces nearly one million ton surplus sugar but high cost of production emerges as the biggest stigma. Textile and clothing industry has not leant to live without the crutches of government support. Fertilizer industry has also attained the capacity to produces exportable surplus but gas load shedding during winter forces the country to import fertilizer. Oil refineries are also the victim of high cost of production and their problems are aggravated due to lingering circular debt.

Therefore, if the incumbent government is serious in pulling the country out of current malice, two radical decisions have to be made: 1) reduction in interest rate and 2) cut in electricity and gas tariffs. These measures will help in reducing cost of doing business and restoring competitive of local manufacturers in the global markets. I am sure the proponent of hike in interest rate will certainly not approve these because they suffer from a phobia that hike in interest rate is the only tool to contain inflation. It is necessary that they get rid of this mindset as early as possible because Pakistan suffers from the cost pushed inflation and not the demand driven inflation. Many of the products have inelastic demand, which increases spending, decreases saving and leads to vanishing investment.

Assuming that the hike in interest rate is on the demand of IMF, it is necessary to reiterate that the reduction in interest rate is necessary to the creation of new productive capacities. It is not a secret that most of the industries in the country are operating below optimum capacity utilization. Therefore, favorable working environment has to be created to improve capacity utilization, leading to production of exportable surplus and containing trade deficit. Once working environment become conducive, influx of foreign direct investment will also increase and help in overcoming balance of payment crisis.

Last but not the least, Pakistan has remained under the supervision of IMF, but the lender of last resort is still talking about introduction of ‘structural adjustment program’. If Pakistan still needs certain structural adjustment, people of Pakistan will be right in saying that IMF has also failed in discharging its responsibilities and stop its mantra of ‘do more’. The Fund must allow Pakistan to cut interest rate and reduce taxes to put the economy back on track. Payment of taxes will increase with higher spending and boost in exports will bridge trade deficit.   

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