IN an extraordinary development, the State Bank of Pakistan announced a large cut in the discount rate equal to 1.5 percentage points. This happened in an unscheduled meeting of the monetary policy committee that was called at short notice and deliberated while the prime minister and his team in Islamabad announced the details of the trillion-rupee-plus stimulus package. It was, by all accounts, an extraordinary day, with the government coming up with a mid-year stimulus package of unprecedented size together with the central bank announcing a rate cut, which, if coupled with the previous 75bps cut a week earlier, amounts to 2.25 percentage points, probably the single largest cut in over a decade. With both these announcements, the stabilisation that began under the auspices of the IMF programme now stands terminated and the government’s hand has been forced to move towards supporting growth.

Extraordinary times call for extraordinary measures. Now that the decision to move towards stimulus has been made in so comprehensive a manner, the next thing to look out for is stimulus-induced instability. An example would be the exchange rate where the effects of the rate cut have been felt right away as the rupee fell by Rs2.6 to the dollar in the interbank market the very next day. The finance team may well have placed the bet that with oil prices crashing and a large deflation about to sweep the economy with collapsing demand, there is ample room to resort to extraordinary steps like steep rate cuts and ramped-up spending. There is no reason to fault them for having made this judgement call, because these are, after all, extraordinary times. But having made the judgement call, they must now show some fortitude in the face of the market reactions that will inevitably come. The finance team, now led by the finance adviser and the State Bank governor, must make their government colleagues aware of the risks of the moves that are being made, and ensure that the authorities do not panic if the market sees sharp swings in the coming days. These swings will be there wherever the market is still operational, stock trading and the exchange rate being key. Demands for shoring up the exchange rate must now be managed, and those for a stock market bailout fund, which are sure to come at some point, must be fended off comprehensively.

Published in Dawn, March 26th, 2020