State Bank of Pakistan (SBP) is scheduled to announce its Monetary Policy Statement on this Saturday (April 9th). While analysts are making all sorts of speculations certain quarters insist that SBP should reduce interest rate by 50 basis points at least. This demand is being raised after Reserve Bank of India (RBI) announced to cut the benchmark repurchase rate to 6.5 percent from 6.75 percent, the lowest since March 2011. This decision has been made despite many odds only to creating more room to face the upcoming challenges.
The options, in terms of priority, being talked about in
Pakistan are: 1) maintaining status quo, 2) an increase and 3) a reduction. Some
analysts fear that most probably the newly constituted Policy Board may opt for
increasing the rate by bowing down before the IMF pressure. The effort will be
to avoid any criticism by the lender of last resort, which is yet to release
the last tranche. Keeping the IMF happy is most important because the incumbent
government will have to enter into another agreement to meet its debt serving
obligations.
To be honest I am fascinated by the decision of RBI chief of
reducing the rate, though it may be termed notional. The logic being offered is
simple, accelerating the GDP growth rate. He is not following any rocket
science but the footsteps of many central banks, even the US Fed is not
convinced about the interest rate hike.
The chief stated categorically that the stance of monetary policy
would remain accommodative and RBI would continue to watch macroeconomic and
financial developments with a view to respond with further policy action as
space opens up. The present RBI chief has cut rate five times since January 2015.
His option for further easing is limited due to the risk of a third straight
year of below average rainfall.
It is true that pressure from the IMF is mounting on Pakistan
for missing some key targets and the country may face even more stringent
conditions under the new arrangements. However, the incumbent government has to
come up with some home grown solutions rather than following IMF recipe
blindly. This demands reduction in interest rate to facilitate fresh
investment, creation of new jobs and above all improving Pakistan’s
competitiveness in the global markets. The cost of doing business has to be
brought down.
The cost of doing has to be brought down by reducing
interest rate, bringing down electricity and gas tariffs and above all coming
up with ‘business friendly policies’. The incumbent government has been enhancing
tax on everything rather than catching tax evaders. Energy crisis is the
outcome of blatant pilferage and non-payment of bills by certain groups.
Pakistan’s economy is plunging deeper into crisis and needs ‘out
of box policies’. The focus must shift from collecting revenue to creation of
new production facilities and jobs. Following the IMF recipe will not bring the
country out of vicious circle of borrowing. The pace of economic activities has
to be accelerated by bringing down cost of doing business and reduction in interest
rate is the first step.
