- Too little too late?
The Monetary Policy Committee of the State Bank in its monthly ‘fix’ on Tuesday merely dropped the policy rate by 75 basis points, disappointing virtually everyone by the caution shown, even though recent events warranted a much larger cut, which was expected by all other stakeholders, particularly textile exporters, who had found the previous rate of 13.25 percent particularly onerous. Exporters said that it was choking exports, but the new rate of 12.5 percent may well still prove too high to boost exports. One reason for keeping the rate high is to keep attracting ‘hot money’ (in an effort to bolster foreign exchange reserves), but an expectation of a higher rate cut saw close to $1 billion of that money flow out in a matter of weeks. Though other central banks have also cut rates, the rate cut will probably not be enough to stem the bleeding away of money attracted by interest rates.
The MPC does not seem to have realised that textile exporters are faced both with order cancellations, as well as intimations that payments will be delayed for goods that have already been shipped. With central banks round the world cutting rates, and government putting together stimulus packages to meet the coronavirus’ economic effects, the State Bank has chosen to be cautious, as if it still fears an inflation that it has not been able to control anyway. The greater fear is of a recession, and there is already talk of a depression. Countries that have been worse hit than Pakistan are not just positioning themselves medically, but also economically. There is natural stress on saving lives, but there is also attention being paid to saving businesses from going under. The epidemic will be over in the foreseeable future, and governments and central banks are taking steps to ensure that economies will re-emerge afterwards in a position to go on.
The undue caution of the State Bank may indicate that there is a desire to keep the IMF sweet. If that is so, this is the wrong time. If need be, the IMF can be told that the country cannot further to satisfy its whims.
