Monetary policy

Published January 25, 2023

THE State Bank’s decision to hike its key policy rate to a 25-year high of 17pc to anchor inflation expectations is largely in line with the market forecast. It is, however, likely to continue its monetary tightening in March unless fiscal slippages are reversed and external sector risks mitigated by fresh foreign financial inflows. Though the bank has brushed aside the possibility of negative growth during FY23, GDP is now projected to expand below the revised forecast of 2pc due to industrial closures. Nonetheless, the notable takeaways from the monetary policy statement pertain to the central bank’s firmer stance on the need for an early resumption of the IMF programme and fiscal consolidation. Not that the bank has ever ignored the importance of these two elements for stabilising the economy, but it now appears to have taken a more definitive position.

Noting that the dearth of fresh financial inflows and continuing debt repayments have led to a drawdown in reserves, it argues that the resumption of the IMF programme is critical for reducing market uncertainty and unlocking multilateral and bilateral inflows. Likewise, the bank has termed the government’s fiscal stance inconsistent with monetary tightening: “… it’s important for the fiscal policy to achieve the planned consolidation ... to help contain inflation and pave the way for sustainable growth”. In November, too, it had pointed to the deteriorating fiscal position due to falling nontax revenues and higher interest payments, but stated it was a challenge to achieve fiscal consolidation in view of the floods. Indeed, fiscal profligacy has been at the heart of Pakistan’s economic and external sector blues, and the cause of its frequent boom-and-bust cycles. Yet successive governments ignored this fact and ran large fiscal deficits year after year. Will the present set-up listen to the SBP, and take a different route to pull the economy back from the brink? It will be clear in the next few days.

Published in Dawn, January 25th, 2023

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