The fact that the MPC and Governor Ahmed appear unconcerned about Pakistan’s record-breaking headline inflation as the country enters election season with a coalition of roughly a dozen political parties in power is promising.
In its first monetary policy statement under the new governor, the State Bank of Pakistan (SBP) supported the status quo, in accordance with market expectations. The Monetary Policy Committee (MPC) of the central bank made the logical and reassuring choice to keep the policy rate at 15%, at least on the surface. It is reassuring since it expresses support for Governor Jameel Ahmed’s current policy path and logical because it is consistent with the realities of the economy.
Since last September, the central bank has increased the policy rate by a total of 800 basis points to slow the overheated economy and reduce the current account deficit. Additionally, administrative actions have been made to limit imports under the supervision of Finance Minister Dr. Miftah Ismail.
Aside from promising to be data-driven, the policy statement offers no indication of how long the present policy rate will remain in effect. This appears to be an intentional strategy to keep inflationary expectations in control as well as recognition that we operate in a volatile global environment where record-breaking inflation has become the norm. Our economy’s vulnerability to external shocks is curbed by our meagre exports and minimal inflows of foreign private capital, but our reliance on the IMF programme and the $12 to $15 billion in short-term loan repayments that we must make effectively make us captive to the external sector.
The only way to deal with unfavourable conditions is to adapt to them, which is hardly an ideal state to be in. The MPC has made it plain that it believes that the reduction in external account pressure on the economy is a result of the monetary and fiscal policies put in place over the past few months, and it anticipates that this trend will continue. Data confirm that domestic demand has declined over the past few months, which has limited imports. Additionally beneficial has been the decline in global energy and commodity prices.
Together, these changes have contributed to limiting the current account and trade deficits, considerably softening the impact of external inflation. The rupee has gained some of its lost value thanks to the developments in the restoration of an IMF bailout worth several billion dollars. The fact that the MPC and Governor Ahmed appear unconcerned about Pakistan’s record-breaking headline inflation as the country enters election season with a coalition of roughly a dozen political parties in power is promising.
It would be an understatement to say that Prime Minister Shehbaz Sharif would be inclined to increase the money supply at this time. His government is already receiving criticism from all quarters for the out-of-control price increase brought on, in part, by monetary tightening. However, it appears that none of the PDM’s electoral priorities have been given a seat at the table. The policy statement provides a clear-cut analysis. It is widely acknowledged that inflation may continue to rise through September before slowing and falling for the remainder of the fiscal year.
This is not to suggest that economic managers should blame the average Pakistani. It is unquestionably necessary to take action to improve the lives of the populace, particularly the less fortunate segments of society. All of that activity, however, must be done while preserving budgetary restraint.
