- Amid a bleak economic outlook
Since the coronavirus took a foothold in the country, the State Bank of Pakistan (SBP) has cut the benchmark interest rate four times with the latest 100 basis point cut taking the discount rate down to 8 per cent. A cumulative cut of 525 basis points within two months, which is a complete reversal from the central bank’s IMF-driven policy of monetary policy tightening, was never on the cards when the interest rate peaked at 13.25 per cent. With international oil prices hitting historic lows due to a drastic reduction in global demand, domestic fuel prices have also been cut leading to a fall in the rate of inflation to around 8.5 per cent in April with SBP expecting ranges between 7-9 percent in the next fiscal year. The cut in interest rate has become especially important due to the severe slowdown in economic activity in the country due to lockdowns and significant fall in spending. Prime Minister Imran Khan has decided to re-open the country in phases for the sake of the economy and daily wagers while the number of cases and deaths are rising by the day. The cut in interest rates is therefore aimed to help businesses and individuals recover from the shutdown. However, the move could prove to be temporary if the situation deteriorates uncontrollably and an even stricter lockdown than before has to be imposed to avoid catastrophe.
These are truly unprecedented times. The causes of deep recessions, the kind that has already set in and has the potential to become worse than the Great Depression of the 1930’s, are usually rooted in complicated economic problems. The coronavirus is perhaps unique in that way that it is an organism not visible to the naked eye that has brought the most powerful economies and their respective health systems to their knees. Pakistan’s external account situation is under control at the moment due to a stable exchange rate, good foreign exchange reserves, a one-year debt freeze from G20 countries, balance of payment support from the IMF and expectation of a stable flow of workers’ remittances going forward. The real challenge, as the SBP has also highlighted in its policy statement, will be the fiscal deficit that could reach as high as 9.4 per cent. With massive shortfalls in revenue and higher expenditures the economic outlook is quite bleak and will remain so for the considerable future.
