The State Bank of Pakistan has cut its benchmark policy rate 1.5 percent to 10.5 percent in its central board’s latest review of monetary policy. The announcement of State Bank Governor Yaseen Anwar to that effect before the news media on Friday reflects the fact that the inflation outlook for the current fiscal year, ending on 30 June 2013, has improved, and that the credit extended to the private sector has come down sharply. However, the bank saw challenges ahead in continued government borrowing and the power crisis. The rate cut was perhaps made inevitable by the recent auction of bonds by the State Bank, where it became apparent that new government paper was overpriced. Since the only way of reducing the price was to cut the policy rate, this happened. However, the policy rate cut will only be considered effective if it leads to growth in the economy. With inflation continuing to run in double digits, and expected to continue doing so, the growth outlook is particularly shaky.
Growth is not just important in itself, but because the government faces an election down the line in a matter of months. With inflation likelier than not to make hollow the inevitable government claims of economic progress, the government will need a growing economy creating jobs while going into the election, and that would mean keeping interest rates low. However, there is no indication that the government is doing what it is supposed to do in times of economic hardship: control expenses. The recent austerity plan approved by the federal government shows that there is an inkling that the problem exists, but there is insufficient will to make the army of ministers give up the luxurious lifestyle they are enjoying at taxpayers’ expense. The government is also doing next to nothing about the energy shortages, and seems to have left jobs to be destroyed and factories to be closed.
The governor said that there was an “unenviable equilibrium of high inflation and low growth.” In such a case, it would be more important for the government to ensure that it set an example to cut inflation and stimulate growth, because an election looms if for no other reason. The government has found that its policies have neither controlled inflation nor stimulated the economy. The emphasis on an imported agenda, instead of home-grown measures, has made this inevitable.