Precarious economic condition

Tough to navigate out of

The State Bank of Pakistan (SBP) hiking up the discount rate by a significant 150 basis points to 8.75% in its latest monetary policy statement (MPS) clearly shows that an aggressive approach towards tackling inflation has begun. Although the move was largely expected, it remained unclear how much the SBP would raise its policy rate. That the SBP had a week earlier raised banks’ C`ash Reserve Ratio one percentage point from 5 to 6 percent, for the first time in 13 years, was an obvious precursor to the MPS aimed at drying up excess liquidity from the market to control inflation. While this move was the obvious route to take, it does little to address other major fundamentals that are in a particularly bad state. The current account deficit (CAD) has swelled to $5.08 billion in the first four months of current fiscal year in the wake of a spike in imports and higher international commodity prices, despite the government’s attempts to curb imports. There is an extent to which the government can go to reduce its import bill. Commodities such as oil, which account for most of the country’s imports, cannot be substituted. A significant amount in taxes is also raised through imports of goods and services as well, revenue that the government cannot let go of. Owing to these limitations, there is a need to increase exports and FDI to reduce the gap.

Separately, the IMF is unwilling to budge on key conditions that the government is having a tough time fulfilling. Further hikes in energy tariffs, removal of tax breaks to certain industries and increasing tax revenue are all measures that the IMF is demanding, which will fuel inflation and reduce disposable incomes. Allowing rupee depreciation to continue is another expectation, one that will contribute heavily towards imported inflation. The economy is in a precarious position and the government’s inability to take timely measures that would have addressed some of the systemic underlying issues of the economy has landed the country in this mess. Lack of consistency and continuity in the economic team coupled with poor decision making, was a recipe for disaster. Navigating a way out of this economic quagmire anytime soon would be a miracle; the worst effects of this economy will unfortunately need to be borne by the poorest sections of the population for the foreseeable future, it seems.

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Editorial
The Editorial Department of Pakistan Today can be contacted at: [email protected]

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