Wednesday September 22, 2021

Policy rate

July 29, 2021

The State Bank of Pakistan has given the news that Pakistan’s Monetary Policy Committee (MPC) decided to maintain the policy rate at seven percent. The policy rate has remained at seven percent for over a year now. This was a significant decision to support the economy during the Covid-19 pandemic, although the claim by the governor of the SBP about 3.4 percent economic growth rate is not appealing to many independent economists. The policy rate and the GDP growth are not translating into concrete benefits for the people. Inflation, which was nearly 10 percent earlier this year, has just been reported to be around nine percent. As the fourth wave of the coronavirus is surging, the pandemic is hardly over and any complacency in this matter may result in more hardships for people irrespective of the policy rate the government keeps.

Some stability in the economy may be visible to the government but the ground realities for the citizens of Pakistan are quite different. To present a rosy picture is not the solution; the government must follow a supportive monetary policy and make changes in accordance with people’s needs rather than to regulate external deficits. In the past, we have seen – especially in 2019 – when the government recklessly tried to regulate the external deficit, it resulted in more financial strains for the people of the country. Such regulation must come in a gradual way rather than abruptly. Then comes the recurring issue of the benchmark interest rate at least six times a year; most of the borrowing and lending activity in the economy relates to it. For now, keeping the policy rate as it is seems to be an appropriate decision, as a low rate makes the availability of credit more affordable.

The government must also keep in view the possibility of an overheating economy if the policy rate is not in harmony with the country’s financial needs. The tendency of any central bank to regulate the policy rate does not always materialize in low inflation, and that is where the crux lies. The government must also galvanize the wheels of the economy for which some other steps are in order. Prices usually rise on the back of printing too many currency notes without the required backup support in the shape of adequate gold or foreign reserves; this is not an ideal solution, no matter what the policy rate is. It is worth recalling that in 2020 the SBP had reduced the policy rate from over 13 percent drastically within three months. Since then, the seven percent policy rate has produced a mixed bag of results. Now the increasing current account deficit is also staring us in the face and needs a comprehensive strategy to tackle it.