Monetary correction

The SBP’s prescription to cut the interest rate is intended for monetary correction and that too in dire straits. It is, however, feared to spiral in inflation. It is common knowledge that the IMF had proposed raising the interest rate up to 25 per cent, in an endeavour to shore up liquidity. But Monday’s pronouncement of the central bank has taken many by surprise as it decided to cut the interest rate by 150 basis points (bps) to 20.5 per cent. This drop of 1.5 per cent will weigh heavily at a time when budget formulation is underway, and a weeklong data points out that inflation has slowed down to a 30-month low.

The SBP’s optimism that its benchmark rate is still in positive cavity will be tested over the next quarter or so. With tax-to-GDP ratio being abnormal, and the government trying to raise revenue by slapping more taxes on an already burdened salaried class, the diagnosis is fraught with consequences. It is hoped that the growth rate will hover somewhere around 2% of GDP, with subdued recovery in industry and services sectors, despite strong growth in agriculture. Not to list out our undue reliance on imports. Yet it is not known whether the budget will go on to tax the holy cows such as big businesses and real estate, or rely on fudging of figures to make ends meet. This interest rate depreciation has come at a time when the current account balance has helped improve the forex reserves to around $9 billion.

The enigma is that the economy is in a status quo trap. The present revenue generation is around Rs9600 billion, out of which only 27% funnels down to handle defence, running of government and development, as debt-servicing eats up all the rest. No amount of regressive taxation can help overcome this dilemma. That means a dipped growth and a setback to sustainability efforts. Our present modus operandi is on excessive borrowing from banks to meet the budgetary deficits. In other words, with investors’ confidence at its lowest ebb, paving the way for stabilising the degeneration phenomenon will entail an out of the box solution.