Pakistani Economy Continues downward Spiral

Prime Minister Imran Khan may feel more secure on the domestic front with the resolution of the conflict with COAS General Bajwa, but economic mismanagement continues to bedevil this government.

The recent decision by the State Bank of Pakistan to boost its interest rate by 150bps to 8.75pc signals a policy pivot from growth to stabilisation. The central bank asserted that its decision was driven by heightened risks to inflation and the balance of payments. However, the real reason economists argue is to convince the IMF to release the next installment.

As an editorial in Dawn points out, “Other actions include changes in the SBP Act to free the bank from the finance ministry’s influence, an increase in electricity prices, and fiscal consolidation through increased tax revenue and cuts in development spending. Hence, the bank brought forward the monetary policy committee meeting by a week to “help reduce the uncertainty about monetary settings” and to bolster the cost of money that exceeded market expectations.”

However, as Dawn asks “will the hike tame inflation? Theoretically, inflation and interest rates are inversely linked. Monetary tightening is perhaps the most important tool available with central bankers to control inflation by contracting the money supply when needed. Interest rates reflect the overall economy.”

However, “higher interest rates must be complemented by fiscal tightening to leave an impact on inflation” which we have as yet to see the government move towards.

Pakistanis have suffered a lot from skyrocketing inflation but the Imran Khan government’s fiscal and monetary policies to tackle this issue will only increase the pain suffered by the majority of the population.

Author: Adam Ahmad

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