Barring any unforeseen developments, the central bank’s Monetary Policy Committee (MPC) expects inflation to start falling from June onwards, which peaked at 38 per cent in May 2023. The MPC also notes that the interbank exchange rate has broadly remained stable since its last meeting.

With this assessment, the State Bank (SBP) policy rate was kept unchanged by MPC — though still at a record high 21pc — on June 12, 2023, for the next two months.

Earlier, the financial market had also ruled out any increase in policy rate as, in its view, that could destroy the economy. According to an independent analyst, the economy contracted during FY23.

The MPC’s decision was largely expected, says a financial analyst, in view of the country’s looming broader economic challenges, including repayment of its debt. The government sees inflation and debt as the major risks to the economy.

Authorities review corrective policy measures amidst fear of high inflation, taxation and devaluation

Similarly, three major threats to business growth identified by the latest survey conducted by the Overseas Investors Chamber of Commerce and Industry (OICCI) were: high inflation (82pc respondents), high taxation (74pc respondents), and devaluation (72pc respondents).

The Pakistan Economic Survey 2023 conceded that the monetary policy, along with import curbs and political instability, caused the prevailing economic downfall. One may add that the cost of living crisis poses a major political risk to the incumbent coalition government with national polls scheduled this year.

The MPC’s point of view follows an earlier report by the international credit agency, Fitch Ratings, that Pakistan is unlikely to devalue its currency as the pressure on the rupee has decreased. “We do not expect a large further devaluation of the Pakistan rupee,” a Fitch official was quoted as saying by the Bloomberg news agency.

Pakistani officials were reported to have said that the foreign exchange reserves have remained stable at about $4 billion since late February after falling 50pc in the past 12 months.

The Economic Survey also claimed that the sharp drop in the current account deficit provided the space for avoiding a sovereign default. The next year’s budget provided that no questions would be asked about the source of income on foreign remittances up to $100,000. Finance Minister Ishaq Dar says: “The devaluation of the rupee is the mother of all economic problems.”

In the above scenario, the authorities are now reviewing the monetary policy for “taking corrective actions.” In his post-budget press conference, Mr Dar said the government would soon introduce a new system in which treasury bills could be directly sold to the general public instead of restricting them to commercial banks, which then raises funds from the public.

Stating that the work was in its advanced stage, he added, “We will do this within two to three weeks, and the finance ministry would itself issue T-bills to the public.”

By doing this, the finance minister possibly wants to induce the banks to lend more to the private sector. Bankers cumulatively lent 85pc of their total deposits to the government as of February 2023.

Bank lending to the private sector plunged 90pc in the first 10 months of the current fiscal year. The private sector borrowing shrunk because of unaffordable high-interest rates in an adverse economic outlook and structural deficiencies in the economy, and is taking a toll on debt repaying capacity, says an analyst.

The banks prefer to invest their maximum possible amount in risk-free government papers. And corporations are keeping their funds in bank deposits instead of investing in projects, waiting for normalcy to return.

The OICCI Business Confidence Index dropped 21 percentage points to -25pc in March-April from -4pc recorded in September-October 2022. Overall, the net confidence level of the manufacturing sector stood at 19pc, and that of the services and retail/wholesale trade at -26pc and -35pc, respectively.

“We need to improve our regulatory environment, make our systems functional and let the people work and invest,” says the chairman of the Nishat Group, Mian Mohammad Mansha.

“If you want to strengthen your external sector and build currency reserves, you have got to do this by attracting local and foreign investment. India has done it that way by implementing tough reforms to facilitate investors and investments [and] the country has been only once in the International Monetary Fund programme since 1991,” says Mian Mansha.

He also made another pertinent point: “We should not look at symptoms of the disease, we should treat the disease first and the symptoms will go away. I want an environment where people can grow their businesses, where people have jobs and where people have money.”

Speaking about budget FY24, Prime Minister Shahbaz Sharif stated that its overarching goal was to achieve self-sufficiency where the economy was insulated from external turbulence and shocks. His government, he added, had paid special emphasis on the growth-inducing sectors of the economy.

“It is unfortunate that a number of measures have been taken that have denied the government manoeuvrability,” says Mr Dar. He recalled that the previous government had amended the SBP law, which benefited the commercial banks and an increase in the policy rate.

Published in Dawn, The Business and Finance Weekly, June 19th, 2023