25 January, 2015 / 30 Rabi-ul-Awwal, 1436

Not a long-term solution

Published Dec 17, 2012 12:05am

THE State Bank of Pakistan managed to cross another rickety bridge on Friday without putting further pressure on the weakening external sector or jeopardising growth prospects. The small cut of half a percentage point in the key policy rate may have dismayed some businessmen. But given the challenges the economy faces at the moment it was perhaps the right response. By continuing monetary easing in response to the broad-based decline in price inflation, though at a slower pace than expected by the private sector, the bank has indicated its desire to support new private investment in the economy to counter weak growth. At the same time, the move is calculated to protect the economy from risks emanating from a deteriorating exchange rate on dwindling foreign financial inflows and huge debt repayments.

But the question is: will the bank be able to continue its monetary easing in its next review two months down the road? Any rise in inflation may force it to put the brakes on, or even reverse, the process of monetary easing. And the risk of inflation very much remains in the shape of a deteriorating exchange rate and massive fiscal borrowing. Unless the government stops or substantially reduces its borrowing from domestic sources and foreign private and official capital inflows start coming in, the inflation risk will remain. The direction of monetary policy in the near term will thus be determined by the successful auction of 3G telecom licences and the release of coalition support fund payments by the US. The medium- to long-term sustainability of low interest rates will hinge on reduction of the fiscal deficit and a substantial increase in foreign inflows. The four-percentage-point reduction in the cost of borrowing during the last 16 months has perked up the economy somewhat. Inflation declined fast, growth momentum picked up and corporate profits rose. Yet private investment remains muted. While investment will not pick up unless interest rates are brought down further, the reduction in credit cost alone is not enough. The energy crisis will have to be addressed, security improved and the fiscal deficit bridged.

Do you have information you wish to share with Dawn.com? You can email our News Desk to share news tips, reports and general feedback. You can also email the Blog Desk if you have an opinion or narrative to share, or reach out to the Special Projects Desk to send us your Photos, or Videos.

More From This Section

Obama’s India visit

Even before US President Barack Obama arrives in India Pakistan has already featured in in the conversation.

Yemeni crisis

UNLESS better sense prevails and all stakeholders choose the route of dialogue to address their differences, the...

Health sector mess

AS the process of decentralisation to the provinces began in the wake of the 18th Amendment health was one sensitive...

Comments (0) Closed