Still not the peak

Let us get this out of the way up front: today’s meeting of the State Bank of Pakistan’s Monetary Policy Committee (MPC) is not about inflation – raging at its highest level in the country’s brief history. It is about appeasing the IMF to get a stalled Extended Fund Facility programme back on track quickly. Will this be the final hurdle before the just over $1 billion tranche is released? It better be. If Finance Minister Ishaq Dar and his team had any hopes to achieve some progress, real or cosmetic, ahead of the looming general election season, they have been well-nigh dashed.

Inflation has gone right through the ceiling, reaching 31.5 per cent – the highest it has been since 1974. Prices were up 4.3 per cent last month from the month before. Food, beverage and transportation prices surged more than 45 per cent. And many think this is still not the peak. March is expected to be higher. Food prices are expected to go even higher as the country approaches Ramazan. In other words, the majority of Pakistanis alive today have never seen this level of economic hardship. The government’s IMF-sponsored prescription – signed by former PM Imran Khan – is focused on kickstarting our external sector. The Fund is now adamant, and the incumbent government not quite convinced but willing to go along with it to secure some urgent breathing space, that Pakistan hike the policy rate to stem the tide of inflation. In reality, inflation seems to have gone beyond the point where it could be tackled by this particular macroeconomic lever. Business leaders have told the government the policy rate hike is not going to have any impact on inflation. A leading Pakistani economist has held for a while that because of the Pakistani economy’s peculiarities, policy rate and inflation are not correlated in the first place.

On the other hand, everybody agrees that a policy rate hike does boost the interest rate, pushing some more people and businesses into bankruptcy, forcing a new wave of layoffs and shutdowns. The government may say it has augmented funding for BISP, but nobody can seriously harbour the notion that any safety net can possibly reach all Pakistanis touched by economic hardship. Besides, the paltry sums BISP does hand out have lost most of their value anyway. Also, now may be a good time to assert administrative control and bust business malpractice.

It is a matter of great concern that the government is not seen taking any visible measures to stem inflation. The economy is coasting on autopilot, and it is headed deeper into the storm. Is the government distracted by the political circus going on in the country ever since it assumed reins of power? Very likely. Are Dar and his team dealing with a situation where Fund officials and other foreign authorities take everything they say with a grain of salt, just in case somebody else storms into power next month? It is possible. Not the least of the government’s problems is that the external sector of the economy has shown no signs of improvement even after the rupee free-float. The trade balance improvement being touted as a success is owing only to administrative curbs on imports. It seems everything is waiting on the rejuvenation of the Fund bailout, although it is difficult to see how much of a difference the billion-dollar tranche can make for an economy the size of ours. In its eagerness to resuscitate the external sector, is our government about to snuff out the domestic sector? It is hard to say, but there is little doubt that if we continue in the general direction, the economy will end up in a contraction. Under the circumstances, while the decision of today’s MPC meeting is a foregone conclusion, the government had a duty to spring into action to arrest and reverse inflation. Leaving the economy on autopilot was never an option.