Not out of the woods yet

As the central bank once again raised the interest rate to an eight-year high

As was expected, the central bank has once again raised the interest rate to an eight-year high of 13.25 per cent. The State Bank, though, has suggested that no further rate hikes or depreciation of the exchange rate are now necessary. The idea is that adjustments pertain to interest and exchange rates from previously accumulated imbalances have now been made and that there is greater harmony between the two. Though it did not completely restrain itself from further adjustments in the future as economic developments may be in the coming months.

However, with inflation up to a five-year-high at 7.34% and expected to go as high as 12% over the current fiscal year, the central bank expects domestic demand to fall. Despite the noises made by the central bank, the country has a long way to go to even attain economic stability, let alone move into green. This is evident from how the government has been grappling with basic inflationary pressures such as the rise in price of flatbreads – a daily staple for the vast millions of the country. Higher interest rates help encourage local savings, boosting bank and government holdings against a promise for higher returns. This, in turn, allows the government to reduce liquidity from the market and limit growth in consumer spending. Hence, in that regard, desires to achieve a 3.5% GDP growth rate by next June against the IMF’s projections of 2.4% appears overly ambitious.

One hopes that the recent hike brings stability, particularly to the exchange rate and the painful yet necessary adjustment process for the new price equilibrium can begin. We may surely have turned one economic corner, later than when former finance minister Asad Umar suggested, but it is still a long way to make it out of the woods.

Published in The Express Tribune, July 19^th, 2019.

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