The State Bank of Pakistan announced another cut, of 100 basis points, in its policy rate ahead of the weekend, bringing it down to 8% from 13.25% pre-Covid. The central bank hopes the cut will be enough to provide some support to the economy, which is being battered by the impact of the Covid-19 coronavirus lockdown. The bank’s decision was helped by the fact that the inflation rate has also been on the decline, thanks largely to decreasing fuel prices. Unfortunately, the bank’s monetary policy committee (MPC), which announced the rate cut, also acknowledged the limitations to whatever fixes it can attempt. This is because of the “non-economic origin” of the current economic predicament, and the fact that a “temporary disruption of economic activity” was required to address it.
While the move could potentially stimulate some economic activity, the bank is hamstrung by the fact that easy access to credit is still limited in the country, especially at consumer-level. The bank may pat itself on the back over how “successive policy rate cuts and sizeable cheap loans provided through the SBP’s enhanced refinancing facilities have helped maintain credit flows, bolster the cash flow of borrowers, and support asset prices”, but this is a stop-gap arrangement, not a solution. As far as business lending goes, while loans may help them brave through a rough patch, much like consumers, it will still be difficult for them to survive unless their incomes return to normal levels soon. That cannot happen until we move past the lockdown phase.
While the bank’s policies provide a temporary cushion, amid a lockdown, there is little it can do to avoid the predicted economic contraction for this fiscal year, or even bolster the estimates for next year. That task goes to the government, and its planning remains debatable. Even the ‘positive’ of declining inflation was not of its own doing. Despite the global oil price crash, the inflation rate for April 2020 was actually higher than the same month last year, when fuel prices were stable. The fact of the matter is that any recovery will be dependent on international support, and international support will be dependent on effective policymaking by the government.
Published in The Express Tribune, May 18th, 2020.
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