- Further squeeze on production
The State Bank of Pakistan on Tuesday raised its policy discount rate by 100 basis points at the latest meeting of the Monetary Policy Committee, a whole percentage point, to 13.25 percent, which is the highest rate in eight years. The speed at which the hike has taken place can be gauged from the fact that it was at 6.0 percent only in January 2018. In its accompanying statement, the SBP hinted strongly that there would be no further devaluation, or policy rate increases, unless the economic data indicated it. The policy rate hike was supposedly directed at containing inflationary pressures. But if economist Dr Hafeez Pasha is to be believed, those pressures are driven by currency devaluation, and can only be overcome by increasing production.
Instead, production is likely to be hit by this rate hike, because it forces producers to increase their prices accordingly, if they wish to service their debt, which will now be costlier. The SBP has been bringing down the value of the rupee since the present government took over, with the result that prices have increased greatly, and across the board, not in any particular single sector. Devaluation means cost-pull inflation, where inflation in imported goods means wage increase demands by workers, which in turn means higher costs and thus higher prices. Higher loan-repayment rates means further cost-push inflation. Thus, manufacturers find they have been hit with a double whammy of higher wages and higher debt servicing at a time when they need to be able to export more.
The basic problem is that the SBP is only acting, under the stewardship of the former IMF country head of Egypt, in the interest of Pakistan’s creditors, not of its people. The SBP is not acting as the custodian of the national currency and the manager of its foreign exchange, but as the IMF’s enforcer in ensuring that Pakistan can repay its debt to it. There is little concern for what happens to the Pakistani people, at how the latest rate hike will create the stagflationary situation of low growth, which means that jobs will not only fail to be created for those entering the job market, but existing jobs will be lost, even as prices rise. That the poor are being squeezed from both ends seems not to matter.