False choices

The stock market reacted in chaos to the State Bank’s decision to announce a hike in the policy rate. No one expected the SBP to increase the policy rate by 150 basis points, bringing it into double figures for the first time in almost a decade. The Pakistan Stock Exchange fell by 3.1 percent on Monday in response. Both the stock and currency markets have been plunged into extreme volatility – and one can only hope that there is someone in the PTI’s economic team that has a grip over what it is doing. The fear over our economic situation is a product of the chaotic decision-making at the helm. Businesses cannot predict how the government is going to act – something which was not true about the last two governments. Both the PML-N and the PPP were fairly clear about their economic agenda, whatever its limitations, which meant that at least big businesses could respond in a predictable manner. This did not do away with volatility in the stock markets, but it did breed a strange equilibrium that allowed some key indicators, such as economic growth and inflation to show positive signs.

The PTI government has decided to throw both of these recoveries out of the table to ‘solve’ the balance of payments crisis – but it hardly makes sense that the balance of payments crisis would be solved by higher interest rates, devalued currency and cutting down public-sector spending. Clueless on what to do on its own, the government has seemingly swallowed the IMF’s prescription wholesale, without doing its own analysis. For critics, the policy instructions from the IMF are looking more and more dodgy by the day.

Let’s start with the fact that the decision to reduce the policy rate itself over the last two decades had come from the IMF. With the SBP having reduced its growth prediction once again to just over four percent, one would wonder what the final readjustment at the end of the fiscal year will be. Let’s remember that the SBP itself had been the one to predict over six percent growth in May this year. Unless SBP officials are incompetent, the blame for the shift must fall on the PTI government. The high exchange rate and high interest rate make for an environment that will be catastrophic to any investment in the country. Investors will hold back their decisions to invest until the exchange rate is stabilised – but this might not happened if the government is firmly in the IMF’s clasp by January as expected. The government has presented itself a false choice: growth or stability. The fear is that its choices are going to result in neither.