Measured cut

Defying expectations that it would keep its key interest rate unchanged, the Monetary Policy Committee (MPC) decided to cut the policy rate by 100 basis points or 1.0 per cent to 11.0 per cent on Monday. The MPC noted in the statement announcing its decision that inflation declined sharply during March and April, clocking in at 0.70 per cent and 0.28 per cent respectively, mainly due to a reduction in administered electricity prices and a continued downtrend in food inflation. This represents a six-month downward trend, and the April inflation reading is also the lowest in six decades. Beyond record-low inflation, March saw a record high in workers’ remittances, helping drive the current account to a $1.2 billion surplus. The surplus and the SBP’s forex purchases cushioned the impact of the country’s large ongoing debt repayments. But, despite these improvements, the MPC has emphasised that the heightened global uncertainty surrounding trade tariffs and geopolitical developments could pose challenges for the economy. This clearly refers to the tariff onslaught by US President Donald Trump and the sabre-rattling from India following the Pahalgam attack. Most analysts had expected these concerns to keep the MPC from lowering rates further, as it had done in March. However, the latter was of the view that the real policy rate remains adequately positive to stabilise inflation and ensure substantial economic growth, but also emphasised the importance of maintaining a measured monetary policy stance.

While there is much to be said about how the government’s monetary stance has eased inflation, the growth revival remains elusive. Provisional real GDP growth for the second quarter of FY25 was reported at 1.70 per cent year-on-year, whereas Q1 growth was revised up to 1.30 per cent from 0.90 per cent. These are some pretty tepid numbers for a country with the population growth of Pakistan and the Trump tariffs saga has only dampened growth forecasts, with the IMF lowering Pakistan’s growth projection from 3.0 per cent to 2.6 per cent for the current fiscal year in its latest World Economic Outlook report. And while prices might no longer be rising as fast, they are still too high for many people to cope with. For all the progress that the government has made in stabilising the economy since last year, the need for reforms remains as urgent as ever and the signs on this front are not exactly encouraging.

The effort to establish a proper revenue or tax collection system in the country, arguably the most crucial part of the reform agenda, continues to struggle. The MPC noted in its statement that the shortfall in tax collection has continued to widen. This is despite efforts to enhance tax collection, mainly by focusing on the salaried classes. It is now past time that the government made a more concerted effort to go after those that have long avoided taxation despite being well able to pay. In this context, the passage of agricultural tax bills by the provinces is an encouraging sign and these initiatives have to be properly implemented. Beyond taxes, the privatisation of loss-making SOEs is still there to be done and the country still needs to find ways to attract more foreign investment. None of this is to downplay the government’s success in combating inflation. But without an economy that can grow fast enough to meet the needs of its people and a state that can actually pay its bills, low inflation will not last for long.