Here we go again – Latest News – The Nation
The perils of uncertainty and a largely absent government! The swing of the dollar-rupee parity continues without any real explanation on the dynamics of the conversion in one direction or the other; future energy costs could be a conundrum as it seems unclear on actual oil and gas forward supply reservations, if any, by the government; salary increases are arbitrarily announced and then temporarily suspended; the political arena continues to be in utter chaos giving businesses no confidence that calm will indeed be restored in the days or even months to come; and challenges related to cost pressures largely due to global supply chain issues and an overall environment of global inflation continue to increase. On the other hand, markets, to function well, need stability.
And that is why it is rather ironic that amidst all this uncertainty and endemic factors that are already fueling inflation in Pakistan, the central bank (State Bank of Pakistan) decides to raise the interest rate by nearly from 325 basis points to 12.25% in one go.
So what exactly is the message conveyed here? Are we in a situation similar to that of Sri Lanka (interest rate at 12.50%) where the government is in a state of conscious default, there is a run on the Sri Lankan rupee and persistent inflation which has seen national savings almost completely eroded since January of this year? year? We sure hope not. On the other hand, it is prayed that thinking at the level of economic managers will reflect this on comparative realities with Bangladesh and India and certainly not with Sri Lanka and Afghanistan – The interest rate in Bangladesh is 6, 75% and in India 4%, our companies don’t. even a chance!
It is hoped that as the new government of Shehbaz Sharif finds its feet, thinking about the economy will be one of caution and sensible realism in assessing what is really driving the Pakistani economy. The author has always maintained that at the current level, Pakistani interest rates are already high enough to push the economy into an official state of recession. In fact, over the past two months, the slowdown has been quite noticeable.
Consumption is down almost 30%, monthly retail figures are down almost 15%, a World Bank report speaks of an impact of almost 50% on the disposable income of the category of working class base, LSM lagging around 8% from around 18% in December 2021, and an SME sector that has been in steep decline since Q4 2021 as its credit drawdown has fallen by almost 25% despite the devaluation of the currency. It is hoped that this is an area where the new political leadership will actively liaise with the Governor of the State Bank to perhaps determine a prudent lending rate to avoid an impending downturn. SBP independence or not, there is nothing unusual about such a dialogue, for example, we saw Jerome Powell recently chairing a debate on the level of interest rates in the United States without tilting his economy into a recession.
The fact is that economic managers who are only academics and who are generally too attached to monetary tools without first determining the extent and nature of their effects on a particular market, often argue that low interest rates are not primarily responsible for low cost production or for that matter operational efficiency and therefore do not have significant weight in determining the final price. We have heard arguments to this effect from renowned central bankers like Christine Lagarde, Andrew Bailey and others; that interest rate hikes shouldn’t be viewed too negatively by companies because they alone don’t create more semiconductor chips, build more houses, or increase production in the chain’s pipeline procurement, and it’s really up to entrepreneurs to manage their finances as well as possible.
However, the reality for Pakistan is that such drastic interest rate hikes may end up slowing economic activity without much easing current inflation, since inflation in Pakistan is mainly driven by external factors: rising world commodity prices and devaluation of the Rupee Pak as a buying instrument.
In our case, raising interest rates to such a level will only increase costs, slow economic activity and further squeeze household portfolios. Remember that Pakistan’s population is young, almost 65% under the age of 30 and with nearly 3 million young people entering the job market each year, which means that what we basically need more than any something else is the creation of more jobs to meet this demand. An interest rate of 12.25%, on the contrary, pushes us into a stagflation trap.
The debate today should not be about how difficult it is to apply the brakes, but about how to adjust interest rates to a level that not only allows Pakistan’s manufacturing industry to be competitive regional, but at the same time helps it address the underlying drivers of the current environment. inflation: mainly shortage of raw materials and goods aggravated by supply chain failures.
In the 1970s, a similar phenomenon of inflation occurred, where prices were pushed up by sharp wage increases, market price increases in a reciprocal chase, and a significant devaluation of the currency – a scenario that is increasingly feared could repeat itself today, in turn leading to an uncontrollable spiral of inflation.
Needless to say here, such rash increases in a country’s interest rates could end up jeopardizing not only its long-term growth sustainability, but also run the risk of pushing Pakistan into a vicious financial cycle where any increase in Future growth prospects may become meaningless or will simply lose relevance, due to the fact that its very underlying ability to service its external debt will no longer remain proportional to the total national market capitalization it holds. Recently, events in Sri Lanka give us a clue to such a situation.
Ironically, this is also exactly the kind of risk or danger that Pakistan faces today unless we quickly remedy the situation and find the right balance between our monetary policy rates and our spending. budgetary measures to prevent a fall in the Pakistani rupee associated with an erosion of economic activity that could push the country into the dark ages.
Recently, Steven Kelly, a research associate with the Financial Stability Program at Yale University, argued in his latest press release that steady, gradual rate hikes show that a central bank is simply trying to bring inflation down. with monetary tools, when the reality on the ground could be very different; one that is more tied to global events (Covid pandemic and now Ukraine war or simple erosion of perception or trust) or local particularities. The case of Pakistan is perhaps no different.