THE shockwaves of a monetary policy decision taken yesterday halfway around the world will soon rumble through our economy. In its Wednesday announcement, the US Federal Reserve — the US equivalent of our State Bank — hiked its policy rate by a whopping 75 basis points in an attempt to cool down inflation, which exceeded expectations in the month of May to rise to the highest level in more than 40 years, according to official data shared last Friday.

US stocks have already fallen sharply this year and are now officially in a bear market, while the dollar is on track to touch its highest in the 21st century. Wall Street is now warning that the US economy may be entering a recessionary period as soon as August. The fortunes of the US economy have a significant bearing on the rise and fall of almost all other economies of the world due to the interconnectedness of global trade and financial systems.

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Pakistan, with its heavy dependence on foreign capital flows and trade, stands particularly exposed. The fallout of the Fed’s decision will be wide on Pakistan’s economy. Stocks are likely to take an immediate battering, while the rupee-dollar exchange rate will inevitably slip further. The deterioration of the exchange rate will, in turn, make imports — including fuel and palm oil — even more expensive than they already are.

Higher US interest rates will also hurt foreign portfolio investments in Pakistan, as individuals and corporations will be looking to take advantage of low-risk returns. Similarly, as an economic slowdown — or recession — takes hold, demand for major exports like textiles, leather and sports goods is likely to fall. As the US is Pakistan’s biggest trading partner, the impact will be particularly severe on the local economy.

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Making export goods will also get more expensive as fuel and electricity costs rise. Remittances are also likely to fall as Pakistanis living overseas are forced to adjust their spending in response to prevailing economic conditions. On the upside, demand for oil — the main driver of economic activity — and other commodities is likely to gradually contract, resulting in a drawdown in prices.

All of these and many more concerns should be weighing heavy on the minds of the country’s economic planners as they head into the new fiscal year. The question that needs to be asked, again, is this: will the budget drawn up by the incumbent government be sufficient for the massive challenges looming ahead? The government’s revenue projections depend heavily on customs duties and taxes that rise and fall with economic activity — will it be able to balance the books as these revenue sources dry up? There should be no pretence about where we stand as we head straight into the vortex of a major global storm. The country now needs firm hands at the wheel.

Published in Dawn, June 16th, 2022