Monetary correction
The SBP in a monetary correction raised its benchmark interest rate by 150 basis points to 8.75% in an attempt to stem inflationary trends, and auto-control the speed of growth and current account deficit. Though such interventions are not new in a regulated economy, what surprised the pundits is the staggering rate and aggressive approach after exhibiting a great amount of conscious control. It remains to be seen how the dipping rupee adopts a semblance of certainty against the dollar, and to what extent inflation is tamed, which is somewhere over the turf of 9%. Now the eyes are set on the international donor, and with the inflow of new tranche from the IMF as the $6 billion loan programme resumes, it is widely hoped that the present turmoil will start receding.
The move was expected, but its timing and level of projection reflect the deep thinking process underway. Global rise in food and oil prices have unnerved developing economies, and Pakistan’s projected growth rate of over 4% was getting tricky to handle. What is required now without much ado is to proceed faster to normalise the monetary policy, and at the same time keep an eye on evolving trends of market forces in pure macroeconomic terms. Curbing down on imports and prudently managing tangibles in exports as the world economy opens up is vehemently advised. Thus, this weekend insertion is technically correct and a calculated move in the right direction.
But there is always a flip side and taking into account the upheavals going around in the regional context, an amount of extra regulation is required. This spontaneous surge in the interest rate could lead to supra-inflation, given that our micro-economic management is a disaster. India and China got away with 8 to 11% of growth in yester-decades because of their tightened control, and this is where we lack expertise. The government should keep pace with its incentivised cash funneling programs such as Ehsaas and Kamyab Pakistan. Subsidising the lower-strata and buoying confidence of the small businesses is the way to go in these tough times.
Published in The Express Tribune, November 22nd, 2021.
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