The inflation news for January showed a further decline in the inflation rate, now down to 2.4 percent, down from 4.1 percent in December. That was not the only good news for the government, as there was also the agreement by Saudi Arabia to defer oil payments for one year. This is particularly welcome, considering that the trade figures for January showed a widening of the trade deficit, which reached $13.49 billion, which would put pressure on the rupee in combination with the recent debt repayments, which have led to foreign exchange reserves falling two weeks in row.
The local inflation rate is a problem, for the State Bank expects it to fall for a few more months, until March, after which it will increase one again, till next September. State is naturally cagey about where it will take interest rates, but with January showing that inflation is still declining, pressure will mount for a further cut in interest rate. With a cut of 100 basis points, the interest rate was down to 12 percent from a high of 22 percent at the last meeting of the Monetary Price Committee. Its next meeting is scheduled on March 25, by which time the February inflation figure will also be available.
The lowering of the rate may be partially because of a rebasing effect, but there is also an economic slowdown in progress. International oil prices are inching upwards again, creating inflationary pressure across the developed world, thus suppressing Pakistani exports, which are price elastic, even as imports are price inelastic. Though the economy seems to be coming out of the stag flationary cycle in which it was trapped, it is now in danger of pure stagnation. That is not what the government wants. There is clearly a crisis of confidence at work, as the real cost of past inflation has been to make consumers wary of consuming, and investors wary of investing. The government should not get nervous, for though the economy is not out of the woods, it is clearly headed in the right direction. At the same time, the government has to hope, and ensure by sensible policies, that confidence is restored, price rises are controlled, and incomes rise, in time for the next elections. This is all the more essential because the government claims that it is the best economic manager of all.
