BY: Babar Akhtar : Published by ANI
When an economy is struggling to regain its footing, policymakers can be tempted to fight fire with fire by cutting interest rates and making credit cheaper. The logic is straightforward i.e., lower borrowing costs should encourage households to spend, businesses to invest and the economy to regain momentum. Yet what works as a short-term stimulus can create longer-term challenges. However, monetary policy is not all about making money cheaper. It is the idea of providing the environment in which growth can sustain itself. In this context, the policy rate decision by the State Bank of Pakistan to keep it unchanged at 11.5 per cent is a responsible measure for the economy that has improved but is beset with high risks. The Monetary Policy Committee’s decision, which was approved by seven of its 10 members, reflects a hesitation to ease prematurely.
The macroeconomic stabilization efforts that Pakistan has achieved recently have been hard won and it is as crucial as they are to maintain the stabilization to ensure faster growth. The new inflation data offer a stark warning to be cautious. The headline inflation rate rose to 11.1 per cent in August, from 9.2 per cent in July. How quickly price pressures can re-emerge is illustrated by such a rapid improvement. When energy imports, as well as energy related commodities, have a strong influence on an economy, inflation cannot be considered a disease that has been eradicated. Of the many factors, energy prices are of special significance. The global price of oil continues to be unpredictable for Pakistan and the unpredictable geopolitical situation in the Middle East has also caused a lot of uncertainty about energy supplies, shipping routes and transportation costs. If oil prices continue to rise, the import bill will also go up, the rupee will be under pressure and the cost of producing and transporting goods and services in the economy will also go up.
The extension of the policy rate will help the central bank to have some space to act in case the external or domestic pressures escalate. Rate cuts could stimulate aggregate demand in the short term, but may prove to be a risky proposition in terms of jeopardizing the already fragile inflation stability, exchange rate stability and external account stability. This should not be at the cost of growth. Instead, it points to a need to differentiate sustainable growth from growth based on monetary incentives. There are other factors to Pakistan's equation of interest rates. Smooth functioning of infrastructure, better access to finance, reliable energy, predictable taxation and technical upgrading and export opportunities are also essential for the businesses. This can lead to investment and productivity even with a conservative monetary policy in the face of these structural factors. The business community should, therefore, seize the current environment with an attitude of looking beyond just lower borrowing rates. Businesses that focus on productivity, energy efficiency, digitalization, export competitiveness and technological innovation will minimize the impact of short-term interest rate fluctuations, ensuring a more resilient business. It is also not a final rejection of monetary easing by the State Bank. Instead, it allows for future possibilities.
When inflation pressures cool down, external vulnerabilities are reduced and economic conditions offer even more confidence, there will be space for monetary policy to adjust accordingly. This is a good thing to have. Central banks need to be more forward looking in their approach than borrowers and markets. Their role is to ensure the price and financial stability with supporting sustainable economic activities. Caution can be economic strength, especially in Pakistan, where inflationary forces can be easily magnified due to exchange rate fluctuations, and imported energy costs.
The nation has already borne a heavy cost for a series of instabilities. Maintaining macroeconomic discipline can contribute to establishing the basis for more sustainable investment, improved exports and long-term growth. But it's not a straightforward decision between stability and growth. Stability can be the key to sustainable growth. However, the State Bank has opted for a wait and see approach, suspecting inflationary pressures have yet to be firmly brought under control, before giving any further monetary easing. Such patience may be vital in today's volatile environment of domestic prices and international energy markets. The need to expedite the recovery process in Pakistan is not warranted. It should be supported by a solid platform. It could be better to take the slow road to stability, than the fast route to speed.
