Prime Minister Shehbaz Sharif can afford to crow. The 9.6 percent inflation reported by the Federal Bureau of Statistics is not just the lowest in the last 37 months, but is also the first time that it has dipped into single figures. Mr Sharif heads a government which is committed, as its primary target, to the reduction of inflation. While any government, elected or otherwise, does not like inflation to reach heights which cause unrest among the populace, an elected government is particularly sensitive in this regard, especially when the IMF seems bent on intervening against policies designed to reduce the power tariff, as it has done with the Punjab reduction, demanding peremptorily that it be withdrawn.
The fall in inflation has been ascribed by Mr Sharif to his government’s policies, but the truth is that the credit will be claimed by the State Bank of Pakistan, which has used the Monetary Price Committee mechanism to hike interest rates to record levels (22 percent) and keep it there. The slowing of inflation, which started around the start of the year, showed that a rate cut was needed, because the gap between inflation and the interest rate was now too great, and would only act to repress growth. It is true that pump-priming in the past has not yielded positive results, and it can be argued that the present bout of inflation may be related to the easing by the PTI government. However, there is another more immediate reason for a rate cut: it will help curb the federal government’s domestic debt servicing cost. It should be noted that a stage has been reached where that debt servicing requires the incurring of debt, which in turn means that the private sector will be squeezed out of the credit market. That will mean more economic growth sacrificed, which is something the government cannot afford.
While the fall in inflation is positive, it should be noted that the high single digits is still not comfortable territory. With growth still low, the economy is still in a stagflationary cycle. Though inflation has come under control, it will still bear watching. The real test of the government’s economic team will come if and when it tries to induce growth, because that is the ultimate goal of any economic policy. That growth will not only mean more tax revenue but more employment, and ultimately better chances of being re-elected.
