The latest inflation figure shows that inflation is running at 3.2 percent, which bodes ill for growth. Disinflation is simply the coming down of the inflation rate because the central bank has taken anti-inflationary measures such as raising the benchmark interest rate. There was even one use of the State Bank’s atomic bomb, the raising of the deposit ratio. However, the rate has been managed down through the interest rates. On the other hand, deflation would imply the coming down of prices. This would harm investment, as entrepreneurs hold back from entering a market where prices were falling, while entrepreneurs already there held back from any expansion or refurbishment,
One effect of the caution of the SBP Monetary Price Committee has been that banks are making money, with high real rates of return, which seems likely to continue. However, this will be a short-term phenomenon if the economy does not pick up. However, industrialists will try to get the State Bank’s benchmark rate lowered, so that they can get cheaper credit from the banks. There is always delicate balance between inflation and growth, and while the SBP is trying to keep inflation in check it is not paying the sort of attention to growth as it should, certainly not enough for the government, which feels a little cheated, because it expected the fall in inflation to make a positive impression on the electorate in two ways: by improving his standard of living directly, and to actually increase his income through higher growth. This is apart from the increased fiscal space created through a lowering of the interest rate, via the lowering of the cost of borrowing (which would mean lower debt servicing costs. It is perhaps unfortunate that lower costs during the fiscal year seemed to go towards meeting IMF targets, as the CBR failed to meet its revenue collection targets. However, it seems there may well be a repetition in the coming fiscal year. If the interest rate does come down, some of the debt servicing cost may be avoided, but there are already rumblings that the collection target has been set  beyond the CBR’s ability.
Instead of letting the CBR slack off on its target, the government must ensure that it keeps its development spending at budgeted levels. One of the first targets of the IMF is development spending, as it is easier to hold back on it, than to cut non-development spending, which is already pared to the bone. Development spending translates into growth, which is what the government wants.
