It seems that the State Bank of Pakistan (SBP) has hit the pause button on interest rate cuts, leaving some doubt in the investors’ mind that it has now indeed transitioned to a phase where going forward—as the government claims—the focus from stabilising has instead shifted to reviving the economy. The Pakistani financial (banking) sector seems to be in good health, as evident from the recent financial results announced by almost all leading banks, so the question is why the uncertainty on truly supporting investment? On one hand we see a consistent government rhetoric on sprucing up the SMEs, helping start-ups, injecting liquidity into the agriculture sector, giving real estate development a blanket to kick-start economic activity and facilitating exports, all in order to rekindle investment and generate employment opportunities, while on the other hand we continue to witness a monetary policy that is still playing catch up when it comes to the main investment promoting tool: Interest rate. Pakistan still enjoys the highest benchmark interest rate in Asia at 7 percent, with Bangladesh at 4.75 percent, Sri Lanka at 4.50 percent, Indonesia at 4.25 percent, India at 4.00 percent, China at 3.85 percent, Philippines at 2.25 percent, Malaysia at 1.75 percent and Thailand at 0.50 percent. Surely, this anomaly has its consequences, which are by now clearly visible in the shape of stuttering investments where in general the trajectory has been negative since 2018; touching almost zero by today—time once lost cannot be recovered.

A recent very insightful publication that is these days doing the rounds in South Asian financial sectors is one by Saugata Bhattacharya, chief economist, Axis bank, where he stresses that post-COVID-19 developing economies which fail to re-generate their historic level of investment by 2021, will simply miss the bus for recovery and are likely to be trapped in a recessionary cycle that could almost take a decade to recover from—essentially they are likely to see a yet another ‘lost decade’. To timely fix the economy from the aftereffects of the corona pandemic, he talks about the three step approach: Survive, revive and thrive, much like the Olympic motto: Citius, Altius, Fortius, meaning faster, higher, stronger—the three words to inspire athletes to deliver their best in competition. According to him, South Asian economies that have not entered the second phase of revival by the fourth quarter 2020, will just end up being laggers. This is precisely what Pakistan needs to watch out for. Basically, an economy runs on twin engines: consumption and investment. The latter took a massive hit after the global financial crisis of 2008 and has never really recovered since. For Pakistan, in recent years this problem has exacerbated owing to unprecedented high interest rates coupled with abrupt devaluation shocks, which saw an overnight erosion of capital of both present and potential investors. As for consumption, the inflation unleashed by this devaluation coupled with a halt in economic activity due to the pandemic safeguard measures, has proved to be a double whammy. Unless the government quickly comes up with significant stimulus measures not just in money terms, but also in terms of policy measures, the current economic slowdown will be irreversible, at least in the short term. And for such a governmental effort to succeed, the SBP will have to help by playing its due part through a complimenting monetary policy.

Well, to the credit of this government, it has thus far shown economic maturity by not overtly pressurising the central bank in any way to make a specific decision at its behest. In fact, it has instead given it the much-needed autonomy and independence, thereby relying on the SBP itself to objectively come up with policymaking that supports the government’s vision and goals. One must say that such prudence in current times may not have been easy to exercise. Unlike here at home, in many of our neighbouring countries, especially in India, this has not been the case. While our government has wisely shied away from meddling into the central bank’s affairs by not only giving it a free hand, but also by refusing to protect corrupt mafias, rent seekers or simply the inefficient and unsustainable businesses, a cursory look across the border tells a very different story of governmental excesses on the liberty of its central bank and the long-term destruction such political interference has caused. Recent revelations by Mr Urjit Patel (Governor Reserve Bank of India—RBI, 2016-18) and Mr Viral Acharya (Deputy Governor RBI, 2017-19 and now a professor at the Stern School of Business, New York University) disclose how Narendra Modi tried to dilute Indian bankruptcy rules to essentially save zombie corporations and how his government lobbied the RBI to extend repayment times for companies with 2 trillion Indian Rupees ($27 billion) in aggregate exposure. Mr Patel from his side relates on how Indian savers felt cheated to see their funds used by the government-controlled banks and other financial institutions for “vague (and extraneous) objectives”, such as supporting politically connected states and companies and, sometimes, the stock market. Such distortions naturally undermine banks’ incentives to undertake due scrutiny in order to properly allocate credit and add to a culture of giving confused price signals, creating an environment where the good companies have to pay for the sins of bad ones. As for Mr Acharya, he also documents other forms of interference: This includes constant pressure to provide stimulus, outright raids on RBI’s reserves to cover budget deficits, and even threats to invoke—by now—outdated clauses in RBI’s legislation that can allow the government to give directions to the central bank when and where these directives can termed to be in “public interest”. He goes on to conclude in his write-up (book) that a silent crisis has been unfolding in India’s banking system, with borrowers prevented from defaulting only because the government is presumed to be able to prop up everything. That works until the government’s “solvency is itself considered to be on the brink”. With the Indian economy shrinking by more than 24 percent in the April-June 2020 quarter, compared with the same period in 2019, and public finances under pressure, the strains today are evident for everyone to see. Thankfully no such issues here in Pakistan, however, regardless of who is calling the shots it is important to remember that the final results are only as good as the very decision-making process that went behind them. In the end if the economy fails to perform it does not really matter who is to blame, the government or the central bank, as by that time it is already too late. The trouble today in Pakistan is that when it comes to shoring up real investment and employment, we may be leaving it for too late. What both the government and the SBP have to realise is that the more we wait the more behind we will fall from our competition and the more difficult it will become to catch up.