They didn’t decide to pull the lever. Yes, there’s lots that the central bank does. But in much of the public’s imagination it is just a giant lever that decides what the interest rate is going to be. And, after a series of increases, the monetary policy committee has decided that the interest rate is to be left unchanged.
This is both surprising and not surprising at all. Surprising, because it is, apparently, what the IMF wanted. Not surprising, because by now everyone in Pakistan at least is aware of the diminishing returns of raising the interest rates when it comes to fighting inflation.
The SBP has justified its decision by citing a decrease in year-on-year inflation. But that does not mean we’re out of the woods yet. In fact, we aren’t even close to entering the thickest part of the forest. Because when the Fund’s conditions are going to be met, we are going to see galloping inflation, specially on the fuel and utilities’ front. But even that does not mean that the central bank will have to raise interest rates eventually. Because that inflation – much like the current sort – is definitely cost-push inflation, not demand-pull inflation. No amount of sucking excess liquidity out of the money market is going to fix that. Our interest rates are already at perhaps some of the highest in our entire history.
There is no running away from the fact that the Pakistani economy needs a massive shakeup. We need to reorient our economy towards an increase in exports (not import substitution) so that our import-heavy economy can at least get those imports at a much cheaper rate. That massive reorganization of the economy is going to require some considerable government spending, which of course, is going to require a significant increase in its revenue. Only recently, did former revenue czar Shabbar Zaidi explain in an explosive television interview how many tax leaks there are in the country and how the political class as well as the permanent establishment closes ranks whenever some meaningful attempts are made to plug those leaks.