State Bank of Pakistan keeps interest rate unchanged

State Bank of Pakistan (SBP) chose to keep policy rate unchanged and the announcement came through a Press Release. The announcement was disappointing because the business community was expecting a reduction of 50 basis points, at least. This perception emerged after the recent decision of Reserve Bank of India (RBI) to cut the policy rate.

RBI decision was in line with the policy of many central banks around the world and also the US Fed which deferred increase in policy rate due to faltering domestic as well as global economy. All the central banks are curtailing policy rates to boost their economies. One completely fails to understand the logic behind not reducing the rate, especially after the constitution of a new Monetary Policy Board at the central bank.

According to the central bank all the key indicators hints towards improving state of the economy of the country. However, it also warns about the future challenges that include stagnant growth of exports, looming energy crisis and subdued GDP growth rate.

Earlier, many of economic analysts were shocked to read a statement of Finance Minster that the country no longer needs the help of International Monetary Fund (IMF). They could recall a report on Bloomberg that Pakistan was inching towards default due to non-sustainability of its debt servicing obligations.

It may be true that he was upset due to inclusion of the names of sons of Prime Minister Nawaz Sharif in the list of Panama Leaks. But no one expected that he could go insane and say that Pakistan does not need the IMF.

Next General Elections are due in 2018 and it was expected that the incumbent would prefer to maintain even more cordial relationship with the IMF but spending more money on developmental programs for boosting confidence of its vote bank.

Pakistan needs to boost its GDP growth rate and the IMF has rightly suggested focusing on improving supply side. This demands spending more on creation of productive facilities and improving capacity utilization of existing manufacturing facilities. Curtailing developmental expenditures is likely to further widening of ‘confidence deficit’ being faced by the PML government.