The recent hike by the State Bank of Pakistan’s Monetary Policy Committee (MPC) of the interest rate to 7.25 percent, a rise by 25 basis points, should perhaps be seen as an acknowledgement that the government’s expansionary monetary policy has not yielded the results desired from it. There is a financial mechanism at work which meant that lower interest rates led almost inevitably to a foreign exchange crisis. The MPC’s increase of the interest rate was cautious, which indicates that future adjustments of the interest rate will be relatively gradual. The preceding expansions had led to money being parked in Pakistan, but the decline in foreign direct investment for the first two months of the current fiscal year indicated that that money had left.
While those funds may have helped achieve a current account surplus last year, and allowed the government to claim that it had achieved wonders in managing the economy, they did not provide a permanent cover to the failure of the government to do what is really needed to fix the economy: end the various deficits. That would require the carrying out of necessary reforms in the taxation system, and putting the government’s finances on a sound footing, not carrying our cosmetic austerity measures, which have proved to be neither here nor there. One result is that the economy is once again where it was when the PTI took over: in the throes of a foreign exchange crisis. The pity of it is that the government is using previous methods of handling it. Tweaking the interest rate is one such method. The use of foreign exchange reserves built up by borrowing, or plainly put, using borrowed money, to prop up the rupee, was tried by previous governments, and roundly derided by the PTI when it was in opposition.
Among the problems the government faces is that it is running out of time. With less than two years to elections, it has no time to do things differently and get results by polling day. It has also not got many options now for the Finance Minister, the present incumbent being the fourth person to hold the office under the PTI government. The present crisis cannot really be handled without displeasing some. This government must show it mettle before it is too late.
