According to the recently released data by the WTO (World Trade Organization) on global trade, the risk of deflation is rising worldwide. ‘Economic recession’ has not receded in spite of all the quantitative easing measures undertaken by the US or by the fiscal stimulus endeavors of the European Central Bank and the Japanese Central Bank. With commodity prices crashing worldwide and with it the real incomes of otherwise strong economies on the basis of natural resources - oil, gold, precious stones and metals, minerals, cash crops also taking a serious dent, there is this sudden realization that a point has been reached in this fight against ongoing global recession where every country needs to contribute its own bit to resurrect a declining situation and to aid growth in its own respective backyard. On November 21, 2014, Peoples’ Bank of China which kept interest rates unchanged during the rounds of global cutting of interest rates activities by other developed economies, finally cut its interest rate for the first time. Considering the recent big push of Yuan’s internationalization by Chinese officials this year, the effects of this significant interest rate cut in practical terms may not just be limited to the Chinese domestic market but in fact will be felt world wide. India likewise is also set to follow suit, as Mr. Arun Jaitley, Indian Finance Minister, last week openly admitted that “a high interest rate is the principal risk facing the Indian economy today” and that he is hopeful that Raghuram Rajan, Governor Reserve Bank of India, will soon do something to address this. Growth in Pakistan has also been stuttering in recent years. Despite promises of huge upcoming investments in the energy and infrastructure sectors by the present PML(N) government, the growth momentum so far has failed to meaningfully pick up. To be fair to the State Bank of Pakistan (SBP), it has been cautious or rather conservative in its approach on setting interest rates. However, now since inflation is being helped by both, a) moderation of food prices globally and as well as in Pakistan and b) a sharp drop in international oil prices (expected to decline further), it moved a few weeks back to cut the interest rate by 50 basis points. Fair enough, but the point is that is this enough or does the SBP need to take a real gamble and go for visibly more cuts?

This gamble clearly being in reference to the ever present trade-off between growth and inflation, and an implicit assumption, that in this trade-off we have today reached a point of inflection. Obviously the SBP being an autonomous body will take its own considered view and is more likely to lean on the side of caution and perhaps delay any further rate cuts. Regardless of what it does, it is a moment to pause and address the call for lower rates, if not debate it. And there is good logic to it. The Pakistani economy, due to a combination of global and domestic circumstances, finds itself on a threshold of a sweet spot. It is not yet there though and only a daring gamble can ensure that it does not miss the opportunity. As they say, fortune favors the brave. In the fine line between fighting inflation and pushing growth, Pakistan has limited room for maneuver; a slip on either side can be economically fatal. It is like being on a razor’s edge, clearly an unenviable position for the Governor SBP – damned if you do and damned if you don’t.

However, the situation must be evaluated in light of current moderation in inflation as well as the softening of global oil prices – which, given the dynamics of competition between fracking in the US and the traditional supplies led by Saudi Arabia, a global slowdown and the rapid cooling of the Chinese economy, means that given all these factors, the ongoing slide is unlikely to reverse at least in the foreseeable nearer-term. And amidst this evolving international scenario, if our government continues to over commit itself to the daunting fiscal-deficit targets it has set for itself or as prescribed by the IMF (International Monetary Fund), it may just end up pushing the Pakistani economy further into the low-growth-cycle trap and even so, still end up missing targets owing to difficult internal and external economic realities.

If the PML (N) government truly desires to deliver in its remaining period, then it is essential for it to somehow lift investors’ confidence and create an optimistic perception on economic opportunities going forward. On a positive note, we already see that several key infrastructure projects are beginning to be unlocked and there has been success in signing fast track agreements with China in tapping the underlying potential in the Pak energy sector. Further, the marginal cyclical pickup in growth (in comparison to the PPP period) is evidence that growth momentum now may not only be on an upward path, but that it also appears sustainable through some strict oversight of our financial lenders desiring an end to the historic culture of frivolous subsidies – An essential feature of any reform program is that users pay and the government consciously decides to direct subsidies only to those economic segments where absolutely necessary or to the poor who cannot do without them. The challenge though, is that poverty and unemployment in Pakistan has risen so much in recent years that to reach the level of growth that is commensurate with the presence of a high percentage of young employable youth in our population mix, some sort of catalyst - perhaps in the shape of low interest rates – will essentially be required. And for this the ball is in SBP’s court. Agreed, that economic logic even today would suggest caution. However, in the real world the way forward is not always based on theoretical economics. It is a moment of real politics and let us see which way the SBP will go.

The writer is an entrepreneur and economic analyst. He can be contacted at