The State Bank of Pakistan’s Monetary Price Committee was facing pressure to lower the interest rate, but the IMF review mission which visited between September and October, had said that interest rates should not be brought down. That might be the reason the MPC kept the present rate of 10.5 percent, even though inflation has been running at well below that figure for more than a year. Apparently, the SBP has estimated that the growth of 3.75 percent to 4.75 percent which it forecast, is sufficient to satisfy the business community, which has been demanding further rate cuts. However, the decision to cut the banks’ cash reserve requirement shows that the SBP does not want to end up damping the economy too far with the interest rate. It should be noted that the CRR is in the nature of an atomic bomb, and changing it is a tool of last resort. It was last changed at the height of the bout of inflation over a year ago, when it was raised to six percent. It has now been brought back to five percent, which in itself should act as a stimulus for the economy. The government must also not jump into the money market and increase its borrowing just because there has been a credit expansion, and should wait for a rate reduction so that it can lower its debt servicing cost.
Governor Jameel Ahmad struck a cautionary note, by saying that all of these measures would depend on external factors. The biggest threat to price stability is the international price of oil. With Iran’s volatility threatening to infect international oil markets, the government has no real room for complacency. The government may want an expansive rate policy, not just to reduce its own debt servicing costs, but because a growing economy is politically beneficial.
Perhaps the biggest dilemma for the government is that whereas it badly needs to increase exports, that depends on two major factors over which the government has no control: the regulatory environment and demand. An example of the latter came from the recent tariffs introduced on US goods. The result of the latter can be seen in the failure of textiles to meet expectations placed on the sector. The MPC should realize that it should not drive the economy into a recession through an excess of caution on interest rates. If inflation continues to remain low, it will have no choice but to cut rates.
