THE increase in the discount rate, as announced by the Governor State Bank of Pakistan yesterday, was expected: interest rate increases are one of the conditions given by international financial institutions for us successfully giving them the touch. The number of basis points was the only thing that kept people guessing. And, at 200 basis points, it wasn't a pleasant surprise, specially for the banking sector. Not only is this going to constrict the liquidity in the banking sector, the bankers are saying, but it is also going to make things tougher on consumers who have taken out flexible rate loans. But sucking excess liquidity out of the banking sector was the whole point in the first place. There's just too much cash sloshing around in the economy, says the State Bank. And now is the time to make amends. By increasing the discount rate, there is going to be a disincentive against taking out loans, ensuring luxury and consumer items don't get financed and only real business investments do. Back in 2002, when the economy had a low growth and (relatively) low inflation rate, the government of the day tried to spur growth by embarking on an expansionary fiscal and monetary policy. We know the story from there on: there was far more inflation than justified the increase in our growth rate, a consequence of more money being spent on non-productive ends. The State Bank started warning the government to tighten its belt and started tightening the monetary policy itself. The decision to tighten the money supply did bear dividends. But this isn't a one-size-fits-all. Hiking interest rates isn't the answer to everything. Because interest rate hikes are a double-edged sword. Sure, it results in stemming the tide of excess money, but it is also an impediment in the provision of credit. It will increase the costs of doing business. And that is not going to be a corrective measure. Our economy's problem arises from the supply side. Unless there is an improvement in real factors, there isn't going to be much headway. The world is undergoing an economic crisis at the moment, primarily led by a slowing down of the biggest cog in the world's economy, the US. But the problem with the US was that of a liquidity crunch in the financial sector. Ours was that of limited governmental fiscal space. It was only the sequencing of the events that made people make a connection between the two. But if interest rates within the country become exorbitantly high, the crisis here is going to start resembling the one there. The one thing we do not need at the moment is constraints for local businesses.