The State Bank of Pakistan has again kept unchanged its key interest rate at 14 percent in a meeting of its Board of Directors. The interest rate was raised by the board in its meeting on November 29. Thus while the State Bank is speaking about the need to promote growth, which it has identified along with poor economic investment and a large budget deficit as one of the major challenges the economy faces, the prerequisite for growth, which is a low interest rate, but which it has refused to reduce, thereby ensuring that growth will be insufficient. The State Bank, which should make policy itself, is just proving to be an arm of the IMF, whose policies on the monetary side it is implementing. On the face of it, ending subsidies and widening the tax net are good slogans, but they are also code for keeping an economy in thrall. It is within this context that Finance Minister Hafeez Sheikh has said that there will be no reduction in defence expenditure, something which the country cannot afford now that the Abbottabad operation has raised so many dangers for the country. However, he has also started pursuing those who, while enjoying a luxurious lifestyle, do not pay taxes, and out of 700,000 he has identified, 55,000 have been issued notices. This is only the beginning, with less than 10 percent of the total of the persons to be targeted. However, it is not known whether Dr Sheikhs parliamentary colleagues are also included. There has also been no movement on taxing agricultural incomes, the loophole through which the most income escapes taxation, including among legislators at both the national and provincial levels. The central government, it is comforting to learn, has resisted the pressure to make fiscal pressure an excuse for cuts in military expenditure. The State Bank must work out how to make the government do what governments do best at times of inflation: engage in austerity measures. These would have to start with its own members, for there is no alternative to setting an example to make others comply. The coming budget should include measures which encourage trade and industry, instead of throwing a dampener on them, as the State Bank has done. It has noted the improvement in exports and in foreign remittances, but has failed to reflect this in the interest rates, which must be brought down, not maintained at such a high level.