Monetary policy

The State Bank has once again decided to hold interest rates steady, to the dismay of industry. But in doing so, it is now betraying the first signs of fatigue as it tries to keep the outlook for the future upbeat. There is no doubt that the economy is slowing sharply, investment is plummeting and unemployment coupled with inflation charging ahead. For the first time this fiscal year, the State Bank has acknowledged that its growth target of 3.5pc “is likely to be revised downward”. Until November the bank was hopeful that the growth target would be met. So the natural question arises: what has changed between November and January that makes it likely for the growth forecast to be revised downward?

One reads the accompanying monetary policy statement in vain for an answer. The external sector “continued to strengthen”, business confidence as per the State Bank’s survey showed improvement for the third consecutive wave and fiscal developments “remained on track”, according to the statement. Cumulatively, the bank tries to argue, these contributed to “buoying the overall economic reform sentiment”. In agriculture its assessment is unchanged from November, with major crop estimates in the Kharif season growing “in line with expectations”, except for cotton. In industry, the pattern is also the same as in November, with gains being seen in export-oriented and import-competing industries while “inwardoriented industries continue to slow down”. Taken together, these developments lead the State Bank to claim that “the slowdown in most economic sectors appears to have bottomed-out, and a gradual recovery is expected in the coming months”.

So if all this is the case, along with “a healthy increase” in tax revenue collections of 16pc and improved foreign exchange reserves, then why is the growth forecast being downgraded and why has inflation remained higher than expected? Inflation continues to rise month on month despite the fact that in November too the State Bank claimed that the higher inflation out-turns were temporary in nature and attributable to upward adjustments in administered prices (power and gas) as well as “temporary supply disruptions”. How long are these “temporary supply disruptions” supposed to bedevil the inflation outlook, and how many more upward adjustments in administered prices are on their way? It seems the State Bank would prefer to not answer this question. In fact, the latest monetary policy statement gives the impression that the State Bank is trying to whitewash what is a rather dismal economic state of affairs. Dr Reza Baqir may be new to the realities of Pakistan’s economic management, but he should know that those before him who tried to walk this path of bargaining with the central bank’s autonomy and credibility paid a heavy reputational price for it. The State Bank governor has a chance to save himself from considerable embarrassment down the road, and should stop trying to have it both ways.