The December reading of the Consumer Price Index was 5.6 percent higher year-on-year, while there had been a month-on-month decrease from November of 0.5 percent, and after an increase of only 0.1 percent over October. This puts serious pressure on the Monetary Price Committee of the State Bank of Pakistan, to lower the interest rate. It has already brought down the interest rate from the 10.5 percent to which it has been brought from a 2023 high of 22 percent. Under its IMF-driven independence, the State Bank has focused on fighting inflation, something it has been encouraged by the IMF, with the latest encouragement coming in last year’s review mission. However, one effect of this has been to stifle growth.
The private sector would like a little pump-priming, and has long demanded a single-digit interest rate. The SBP is taking its own sweet time getting there, and is now just six-tenths of one percent from that goal. The government, like all of its predecessors, wants that rate cut both for political reasons and for governance reasons. Politically, growth means more jobs, and thus an electorate which looks on it favourably. There is however one problem: growth depends on exports to the USA of textile made-ups. With the new tariffs in place, it seems textile exports have fallen off. Demand seems depressed, and demand needs to pick up considerably before it becomes a source of growth. Besides, much of that growth would result in hiring those previously laid-off, rather than provide for those new entrants into the job market, whose ballots are so important in the next election. The government has a more immediate need for a rate cut: that would reduce its debt servicing costs, something the IMF also desires greatly.
However, the present scenario needs two caveta. First, it depends on global oil prices remaining at present levels, if not going down further. The recent drop in fuel prices will be reflected in the January inflation figure, but only if it sustains. Second, too an interest rate because of law inflation is a threat to the very banking system. That is far from the case at the moment, but it can be seen on the horizon. However, the present situation, with interest rates so high while the inflation are is falling, takes the country into uncharted economic territory, and is too unpredictable for anyone’s liking.
