Achilles’ heel of PTI government

October 2, 2018

The most recent interest rates hike by the SBP signals worrying development underneath the exterior. Current dismal state of economy exposes Achilles’ heel of the incumbent government, which is still
clueless whether to go to IMF for a financial bailout package of $9b or not. In fact, this financial bailout package is much higher than the standard sum of $2.54B, therefore IMF may be hesitant to consider
such request unless the government fulfills the harsh conditions imposed by the Fund, which apart from increasing interest rate comprises cut in PSDP development funds, elimination of subsidies, tax
restructuring, hike in gas/electricity prices, devaluation of currency and above all review of CPEC debt repayment schedule. The US government as main donor of Fund has raised serious apprehensions with
regard to this bailout funds to be used in repayment of Chinese loan. We may be seeing more of these bitter pills in near future. The economy has slowed down and financial market is jumpy seeing little
investment both local and foreign. Hard times lie ahead. Income tax concession given to high earners gave an erroneous signal at large. The announcement by State Bank of Pakistan to increase its main
interest rate by 100 basis points to 8.5 per cent for the next two months, citing rising inflation and economic worries over the large fiscal and current account deficits shows concerns on the economic
front continue to persist and are expected to compromise the sustainability of the high real economic growth path. The widening current account deficit has fuelled widespread speculation that Pakistan may need another bailout from the International Monetary Fund. Earlier, SBP had said that a number of factors, including increasing inflation and volatile commodity markets, are a threat to financial stability in the next six months. Raising interest rates can at times brings foreign capital, but given the unpredictability in the exchange rate, it is improbable to take place. Higher rates can make growth sluggish. Slow growth and higher inflation is a hazardous mixture which excessively affects the poor. This is a terrible wind blowing against the direction of voyage of the PTI government. Hysterical measures will only add insult to the injuries. Self reliance is the best solution in such situations. We can prevent this from happening by strengthening the National Savings, an act which will provide all the necessary funds to take the tide over and its second leg could include Foreign Exchange National Savings Scheme.
This measure will help escape further pressure on Pak rupee, devaluation will not follow and the common man will get relief. Such policies be devised that increase exports and decrease imports and
business community be encouraged to establish industries of import items for local manufacturing. These steps will help lessen foreign trade deficit.

Widening current account deficit fuelled speculation that Pakistan may need another bailout from IMF.

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