The 100 bps cut

The central bank has once again opted for a monetary correction by slashing the interest rate by 100 basis points to 19.5% from the previous rate of 20.5%. This, the State Bank pundits believe, has been done by studying the declining trend of inflation, which many market forces beg to differ. Though cuts in the interest rate usually lead to inflation, this decision has come on the premise of improvement in external accounts, despite a sustained pressure of debt repayments. It remains to be seen whether the step leads to economic activity or not, but a glance at the scaled-down confidence of masses makes it a horrendous task to keep the wheel of the economy rolling.

The monetary calculus is in need of being read with somersaults that finance gurus are facing these days. A day ago, the finance minister painted a dismal state of affairs, saying that the country is in need of learning to live on its resources, and ruled out the possibility of friendly states again and again coming for a rollover. That means Pakistan is in dire need of $27 billion during the current fiscal year to meet its ends, and that is quite a staggering proposition. Talks with China and other Gulf States for a rollover of $12 billion annual debt portfolio by three to five years has hit snags, and the only way out is to bank on the IMF largesse for a generous bailout to the tune of $8 billion.

This loss of fiscal space is coupled with political instability which is pestering and leading towards the brink. We have not been able to cut the coat according to our cloth, and have miserably failed in slashing non-developmental expenditures. The size of the government and perks and privileges have simply burdened the tax kitty, and led to wider parochial sentiments. The way ahead is one of stringent regulation wherein all production is export-oriented, and the tariff structure of energy is slashed to boost competitiveness. If not, the dipping statistics could lead to mini-budgets. The litmus test is how we deal with the Fund, and on what critical conditions.