Policy rate

The trend of falling policy rates in the Ishaq Dar era has come firmly to an end. The State Bank of Pakistan this past Friday confirmed that it would be increasing the policy rate by 50 basic points to 6.5 percent. The change came with a stark warning: the precariousness of Pakistan’s external account situation cannot be overstated. There are significant risks to the pattern of an improving growth rate. The country is witnessing a deteriorating balance of payments, high petrol prices and low financial inflows. The last of these continues to make little sense given the CPEC-related projects – but the Chinese investments seem to be missing from the paperwork on financial inflows into the country. The SBP is concerned that the twin deficits – current account and fiscal – are going to exceed earlier estimates and are likely to get worse next year. The budget deficit figures are worrying and challenge the tall claims of current Finance Minister Miftah Ismail about bringing the fiscal deficit in check. The SBP predicts the fiscal deficit to be 5.5 percent of GDP compared to 4.1 percent for the current fiscal year. This is despite the fact that the federal government slashed development spending in the 2018-19 budget.

The good side of the SBP statement is that economic growth will hit a high of 5.8 percent this year and inflation remains below the target of six percent. However, the SBP has concurred with the IMF and World that the 6.2 percent growth target for next year is “ambitious.” It has pointed to the need to manage growing pressures on the external account, but there are no magic bullets available. This should also raise questions about the SBP’s own analysis of the Pakistani economy. Why the SBP kept the policy rate stable before January this year? The country’s fiscal picture cannot change so rapidly given the absence of any exogenous shocks. Was it succumbing to political pressure before? And is it succumbing to external pressure now? The fact remains that there are serious concerns about the country’s economic health and macroeconomic stability, but these were visible to independent observers even when Dar was proclaiming the PML-N had achieved macroeconomic stability. The SBP and international financial institutions chose to parrot the same line before deciding in the middle of the current fiscal year that all is not well. Most of the measures suggested do little to solve the problems in the short-term. If the situation is as dire as the SBP suggests, it needs to go for bolder measures than a mild increase in the policy rate.