- Discount rate remains unchanged
The State Bank of Pakistan, in its latest monetary policy statement issued every two months, has kept the discount rate unchanged at 13.25%. The rate had been kept the same in the previous MPSs as well. This was largely expected owing to inflationary pressures that have thus far continued to intensify rather than abate. The report highlights how inflation has remained and will continue to hover in the 11-12% range for the remainder of the current fiscal year, meaning in all likelihood the higher interest rate will remain in place for a considerable period of time. The primary factor causing “inflation outturns” has been the increases in food prices that the central bank deems “temporary”. Yes, there are some seasonal factors influencing prices but it remains to be seen if prices really settle down; so far they have consistently been increasing, and why wouldn’t they? Continuous hikes in electricity prices and the higher cost of diesel and petrol also add to costs, translating into higher prices. And with the IMF unwilling to budge on either one of these primary business input costs, it is unlikely that inflation will come down to the targeted 5-7% in the next two years.
The situation is better on the external account front, with the current account balance recording a surplus for the first time in four years largely owing to a drastic fall in imports. This is however a result of a higher exchange rate and government policies that have discouraged imports, as opposed to the significant increase in exports which would be more desirable. Private sector credit falling by Rs4.1 billion during the first four months of the current fiscal year, displays a severe slowdown in business activity as borrowing is expensive and investment in the current scenario is not an attractive prospect. This is why an increase of Rs11.3 billion has been recorded in the governments fixed investment instruments as people take advantage of the higher interest rate. As long as this monetary policy tightening continues, those who have the capital to save and earn interest will be much better off than those already having trouble making ends meet, living paycheck to paycheck.
