THE State Bank of Pakistan has made a prudent decision by maintaining its key policy at 22pc given an uncertain inflation outlook, downward risks to the currency, and political volatility. Even though a semblance of economic stability has returned to the country under the short-term $3bn IMF bailout programme, the situation remains erratic. In other words, the required prerequisites for a rate cut are not yet in place. For instance, the bank has increased its inflation projections for the current fiscal to 23-25pc from the earlier estimate of 20-22pc due to frequent and sizable adjustments in administered energy prices. In its monetary policy statement on Monday, the bank says the rise in energy prices has slowed down the pace of decline in inflation anticipated earlier, besides impeding a sustained decrease in inflation expectations. This is in spite of moderating food and core inflation in the past few months due to the tight monetary policy stance supported by ongoing fiscal consolidation, lower global commodity prices, and improved domestic crop output and supplies. It has also revised its target of containing medium-term inflation to 5-7pc by June 2025 to September 2025.

Then, a finance ministry report shows that Pakistan’s fiscal deficit crossed 2.3pc of GDP, the highest in three years, in the first half of this fiscal year mainly owing to an almost 64pc surge in interest payments and defence spending over the last fiscal year, despite tight control over other expenditure, drastic cuts in the development budget, and increases in the tax and non-tax revenues. Likewise, the current account deficit during this period has declined by 77pc to $0.8bn, and the exchange rate has appreciated. However, this external stability is achieved by slowing economic growth at the cost of jobs and imposing import curbs. Escalating tensions in the Red Sea region, which have recently led to a surge in global freight charges and are posing a risk to international trade and commodity prices, could prove to be a serious shock that the frail external recovery might not be able to deal with. The real interest rates remain positive

on a 12-month forward-looking basis, but the State Bank must resist every pressure and temptation to reverse the present monetary stance unless inflation falls below the current policy rate, for broader economic recovery, and external account and currency stability.

Published in Dawn, January 31st, 2024