That the CPI reading for November is down to 4.9 percent indicated that the fall in inflation that has been observed since the present government took over in February is continuing. The uptick seen in October has dampened down, now with the lowest figure in six and a half years. It is certainly an improvement of the succeeding inflationary spiral, which peaked at 29.2 percent in November 2023. Prime Minister Shehbaz Sharif’s prediction that this would mean a cut in the interest rate was probably dually motivated. On one hand, as PM, he probably saw that a fall in interest rates would make his task of servicing the debt that much easier, as interest payments would go down. At the time of the last ‘fix’, when the rate was brought down 250 basis points to 15 percent, it was predicted that the cuts so far (from a high of 22 percent at the beginning of the financial year) would save Rs 1.3 trillion in debt servicing. The expected interest rate cut should mean debt servicing will come down even further. On the other hand, as one who started as a business leader, he would see a further cut in the interest rate as good for business. Indeed, even though the last rate cut was deep, business leaders felt it should have been deeper.
One consequence of the rate cut should be an increase in the stock market, which only crossed 100,000 on the KSE-100 Index on Friday, and which went up 1000 points on Monday, went up a further points on Tuesday, closing at a new record level of 104,000. The challenge for the government will be ensuring that growth is not sacrificed, as the economy cools down. The growth target of 3.5 percent is anaemic enough as it is, and cannot be reduced any further, which could well happen if inflation falls much further, dragging down the interest rate.
CBR officials may well be celebrating most, for the decline in debt servicing is helping to cover for the CBR’s tax collection failure, which has been Rs 362 billion so far this fiscal year. At that rate, the shortfall would equal the reduction in debt servicing. That seems a singularly unimaginative way to apply a windfall of the magnitude that is developing. The government must also watch out for headwinds: the fall in inflation depends on international petrol prices and a stable rupee. It must be watchful, for there is much to go wrong.
