Record interest rate

The State Bank of Pakistan has had to walk back previous projections and claims that inflation would be going down, raising the policy rate by 100 basis points to reach a new record level of 22%.

The move comes two weeks after the central bank’s monetary policy committee warned of more inflation as a result of new economic measures, some of which were blamed on government austerity, and others on compliance with the IMF’s diktats — specifically, all the new indirect taxes in the federal budget and the withdrawal of the import prioritisation policy.

Normalising inflation has also become a yearslong project, with the bank again setting a target of 5% to 7% by the end of fiscal year 2025. The monetary policy committee said the rate hike and budget austerity could help the government moderate inflation and address external sector vulnerabilities while also addressing economic uncertainty. But that projection remains heavily reliant on policymakers holding the line, which is a tough ask given the political uncertainty and the need to hold elections in the coming months. While recent speeches by PM Shehbaz Sharif and others have made it clear that Finance Minister Ishaq Dar’s job is secure till the government is dissolved, Dar’s penchant for unconventional efforts to control the exchange rate could add to inflationary pressures.

However, one unspoken remedy could be in the fact that most of the IMF’s conditions have been met, meaning that the loan programme will become usable again. The IMF programme would bring in enough dollars to ease pressure on forex reserves and keep down the gap between the official rate and the market rate, meaning that while inflation would still occur, it would be significantly eased thanks to a steadier dollar exchange rate.

But amid all the stopgap solutions, the government remains unwilling or incapable of bringing the deficit in check without taking inflationary measures. That is why direct taxes remain a rarity and the poor continue to live within a noose of indirect taxes.

Published in The Express Tribune, June 28^th, 2023.

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