Each of the reports could on its own trigger a rise in the interest rate, but put together, they merely make it certain. Also, they all indicate that there is more inflationary pressure on the economy, which will incline the State Bank’s Monetary Policy Committee to carry out a big increase in interest rates. The first problem has been the report that Pakistan’s trade deficit with the South Asian region has increased. This means that one of the supposed benefits of greater regional stability has not materialised, mainly because Pakistan has not done enough to get other countries to withdraw non-tariff trade barriers. It does mean that the region is adding to the balance of payments problem rather than solving.
One sign of that was the sharp fall in the rupee, which at close of trading on Friday had touched a new low against the dollar, with it not clear whether the decline was at an end, or whether the rupee would fall further. The rupee had recovered earlier in the month, when the Saudi oil facility was announced, along with a major cash injection for the State Bank of Pakistan, but the receipt of the cash has not been confirmed. Indeed, it is not known what the SBP is upto, as to whether it will use this money to defend the rupee. Part of the reason is that the SBP Governor spends so much time in Islamabad, where he is said to be pursuing political ambitions.
The SBP has meanwhile been responsible for a last-ditch effort to contain inflation by raising the Cash Reserve Requirement from five to six percent. This is almost a panic measure, which central banks only use when the government has run out of other options to control inflation. One of the knock-on effects is a rise in interest rates. Such a rise will also help bolster the foreign exchange reserves as ‘funny money’ comes in, in the form of portfolio investment, in search of the high returns which will be paid from SBP reserves. The signs are almost entirely negative, and give the impression of someone desperately bailing the ship even as the waves get progressively higher. There is a sentiment that no one is now bothering to reverse the situation, but merely to manage it so as to make the pain of the final fall as limited as possible.
