The State Bank of Pakistan board of directors on Saturday cut its policy rate 50 basis points to 10 percent, following up its previous cut in August, of 150 basis points. This cut is based on the belief that inflation has indeed slowed down, with the SBP Report on Monetary Policy claiming that inflation was down to 8.8 percent in September, being lower than estimated, and there was an increased likelihood that the target of 9.5 percent for the current financial year, would be met. The report said that the influence of falling private sector demand was becoming more pronounced than the inflationary effects of high fiscal borrowings. As this government has not responded to the situation by reducing its spending, and thus bringing the budget into greater balance, it has had to rely on borrowing heavily from the State Bank, which means printing banknotes, to maintain the luxurious lifestyles of the army of its ministers that are holding office.
Another intriguing aspect is the Monetary Policy Report’s toeing the government on inflation. Though the SBP predicts a meeting of the target, the common man sees no relief. It is almost as if the government, realizing that it is entering an election year, would like its control of inflation to be spoken of. However, it does not seem to realise that the ordinary consumer has not yet absorbed the effects of the inflation that has already taken place. As it is, the inflation target is too close to two digits to be comfortable. It has not helped that a vast number of jobs have also been lost, resulting in further impoverishment.
The government should at this point be preparing itself to take measures which are pro-people and pro-growth, which stimulate the economy and make it create jobs, and push exports. Though the State Bank took the major step of reducing the daily minimum Cash Reserve Ratio (CRR) to 3 percent (while maintaining the weekly CRR at 5 percent), this seems more a result of the policy rate cuts than of any instructions of the government. It should give more of a lead than it appears to be doing, but it can only do so if itself is acting against inflation, than borrowing so much it appears to be wanting to fuel it. Though it has been made relatively independent, the State Bank remains a tool available to the government, but it should be used for economic ends, rather than political.