The State Bank of Pakistan kept its policy rate unchanged at 12 percent, after last changing it in October, when it was cut 200 basis points. Its reason for keeping the rate unchanged an attempt is to contain inflation in the second half of the current fiscal year. The retention of the old rate was approved by the Bank’s board of directors, in its meeting on Saturday. The most worrisome aspect of the affair is the attitude of the federal government towards an institution that is supposed to be an integral part of its economic policymaking team. The State Bank has not pointed out for the first time, as it did on Saturday, that the government’s borrowing is worsening inflation. Yet the government continues to ignore this, preferring to use taxpayer’s money to subsidise a luxurious lifestyle for its members. It is doing so even though there is a direct relation between inflation and a sitting government’s chances of being turfed out by the voters, and even though there is an election just around the corner, even if it is not premature. The government is thus squeezing out the private sector by borrowing as much as it is, and the contraction in falling private sector credit, and the falling volume of imports, combines with the declining inflation trend to indicate a fall in aggregate demand. That means the economy is not growing.

State Bank Governor Yaseen Anwar at the press conference announced the decision that ‘a declining interest environment together with a relatively better growth in Large Scale Manufacturing (LSM) is expected to help the pickup in private sector credit’. This is an implicit acknowledgement that the real solution to the present low-growth scenario lies in an interest-rate cut, but the State Bank has not carried it out. One of the potential sources of high inflation is the security situation; another is a potential rise in oil prices. The security situation in Pakistan is the result of instability in neighbouring Afghanistan. The government, instead of extricating Pakistan from a global war which has proved deeply unpopular with the people of Pakistan, has tried to ensure that the alliance remains despite tremendous loss of life and livelihood.

The State Bank analysis, upon which its decision was based, shows a government too feckless to control spending and too weak willed to impose necessary reforms. However, though the State Bank did not have an easy decision to make, it should still have focused on growth, and cut interest rates.