Inflationary peril

The latest interest rate increase by the State Bank is at least partially in response to the 35% inflation

April 06, 2023


The State Bank has taken the interest rate up to a new record level of 21% with its latest 100 basis point hike. Amazingly, this is still significantly lower than the 200 basis point increase most analysts were predicting, although more hikes may be forthcoming. The latest increase is at least partially in response to the 35% inflation report for March, and the fact that despite the central bank saying “there are early indications of inflation expectations plateauing”, it acknowledges it will be “at an elevated level”. The widespread belief is that the increase was toned down in order to avoid killing investment while also complying with the IMF’s stability conditions. Unfortunately, there remains a high likelihood that neither of these goals will be accomplished without more efforts on the fiscal policy front.

In fact, the World Bank has now slashed Pakistan’s growth estimate from an already-paltry 2% to just 0.4% for the current fiscal year, and even that figure assumes a deal with the IMF will be reached soon. While the country’s leadership may cite another World Bank report that said the entire region is seeing a decline in its growth rate, we should note that Sri Lanka and Pakistan are almost entirely responsible for that decline. While India, Bangladesh and smaller countries have all taken hits, they have managed their resources and responded to external events, such as the war in Ukraine, much better than us.

In fact, despite hitting rock bottom, Sri Lanka has managed to avoid the harrowing reports of deaths and injuries on bread lines that we are now regularly reading, and there are some positive moves in the right direction. This is because once Sri Lanka acknowledged that it was holding a begging bowl, it began complying with the IMF rather than acting like Finance Minister Ishaq Dar or Imran Khan and his cavalcade of finance ministers whose chest-thumping for political optics has repeatedly endangered the loan programme.

Published in The Express Tribune, April 6th, 2023.

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