The State Bank of Pakistan’s Monetary Policy Committee has kept the policy rate unchanged at 22 percent, making it the fifth time in seven months that it has done so. This important anti-inflation measure has not really worked, for inflation is not coming down. SBP Governor Jameel Ahmad, in a press conference after the MPC meeting, blamed the government’s raising of power and gas tariffs for the inflation spike, predicting that inflation would remain in the 22-25 percent range for the fiscal year. Since SBP had originally projected inflation of 20-23 percent for the year in July. Even that was punitive. He has predicted a decline in inflation, with the 23.7 percent recorded in December as the highest, from March. The high policy rate has two consequences: one is the squeezing out of the private sector from the credit markets, with the corollary that some businesses would be rendered unviable by the high interest rates, the second is that government borrowing would be rendered more expensive.
One consequence has been that SBP has made profits like never before. According to the July-December financial report released by the federal Finance Ministry, SBP made profits of Rs 972 billion, up 161 percent on the same period the previous year. However, that same report made it obvious that government machinery was beginning to creak ominously. With Rs 4.22 billion in interest payments exceeding the net income of the federal government by Rs 207 billion, it means that the federal government is now borrowing not just to meet its current expenditures, but also to make those interest payments. Therefore the policy rate is affecting the government adversely, and as it seems to be having no effect on inflation, it seems to be something of a pleasureless sin.
In a different universe, presumably, the rate would be cut. However, it has to be kept where it is as dictated by the IMF. The whole MPC mechanism was established to keep the government from dictating to the SBP. Instead, it seems, the IMF is doing the dictation. What is the point of removing one puppetmaster only to replace him by another. The rupee has been in virtual freefall and inflation has raged all the while the policy rate has been kept at the present level. If a measure is not working, then it should be changed.
