Another rate cut

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A third rate cut in a row by SBP – this time by 200 basis points – must be a source of satisfaction for industry leaders most of whom were expecting the benchmark policy rate to go down around this much only, though there were some who were advocating for a more dramatic 500 basis points reduction to spur economic growth, based on a positive real interest rate of 10 per cent. The central bank has, however, been cautious all along, and rightly so: while the inflation rate has come down quite considerably – to 9.6 per cent in August from 12.6 per cent in June – weak inflows and continued debt repayments are still among the major concerns.

As is believed, theoretically, the cut in the cost of working capital will encourage private sector investment and spur economic activity, thereby creating the much-needed employment opportunities. And as the ease of doing business and access to finance in the country is at the lowest in the region, the reduced cost of borrowing in the wake of the policy rate cut will help exporters whose products had been rendered uncompetitive due to extremely expensive working capital, coupled with a very high energy tariff. On the flip side though, the repeated interest rate cut – from 22 bps to 17.5 pbs in three bimonthly assessments – is in conflict with the IMF's demand to rather enhance it to something around 24 per cent so as to overcome the current account deficit on way to achieving macroeconomic stability.

While the 44 per cent rise in the volume of remittances – to the tune of $1.813 billion – in the first two months of the ongoing fiscal year must have come easing monetary pressures, what's direly needed is to galvanise the SIFC mechanism to bring in foreign investment and increase inflows to tackle the current account balance.