The State Bank of Pakistan Board of Directors decided on Friday to hold the bank’s policy rate at 9.5 percent, thus keeping the underlying interest rate punitively high. The board, which met at the bank’s Karachi offices, took this decision in view of the depleting foreign exchange reserves, while ignoring a continuing dip in inflation. According to the figures available to the board, inflation year-on-year had declined from 8.1 percent in January to 6.6 percent in March. This should have meant giving the economy the stimulus of a cut in the interest rate, but in the same period, the bank’s foreign exchange reserves went down from $8.7 billion (at end-January) to $6.7 billion, mainly because of foreign debt repayments. Within the current fiscal year, the IMF must also be repaid $838 million, placing further pressure on the foreign exchange reserves.

Another factor making the bank maintain its policy rate was the government having borrowed Rs 853 billion from the banking system up to March 29, against the full year estimate of Rs 484 million. This indicates that the government which just left office did not do what governments are supposed to do in such an economic state: control its expenditures. The bank has carried out its only review of the policy rate under the caretakers. It will be the same board that carries out the next review, but a new elected government will be in office. It is imperative in the current situation that both the caretakers and the new government observe rigorous fiscal discipline, and not misuse taxpayer’s money to maintain a luxurious lifestyle. The government should assure the bank that it would not use the opportunities provided by any lowering of the policy rate for itself, but would let it serve as a stimulus for the economy.

The caretaker government has the responsibility of holding free and fair elections, but it also has the duty of ensuring that its elected successor faces as easy a task as possible. While the timing of the election is such that it will have to present a budget virtually as soon as it takes office, an appropriate step would have been to inject an appropriate stimulus into the economy. The bank may well be independent, but the biggest player (and stakeholder) in the money supply remains the government, and it must act accordingly. Previous irresponsibility has led to the situation being what it is.