With February’s inflation reading down to 1.5 percent, the lowest it has been since September 2015, the Prime Minister can be forgiven for making crowing noises, but there are concerns raised about whether the country is being treated to too much of a good thing. Therefore, the next meeting of the State Bank of Pakistan’s Monetary Policy Committee, scheduled for March 10, will not only face a further demand for an interest rate cut, but will be inclined to grant it. The State Bank itself has projected a further fall in inflation in March, before a rise which should last until Ifat least September. The MPC will have to consider whether there should now be a stimulus imported to the economy. The way the banking system works, there was to be a degree of inflation to keep the economy growing, so the layman’s ideal of falling prices would actually mean that the banking system was on the verge of collapse and the economy was in the throes of a full-fledged recession, perhaps even a full-blown depression.
The MPC might feel that the time to worry would be if inflation did not start going up after April, or if it went up too fast. If inflation is going to go up in controlled fashion, maintaining interest rates at around the present level might seem the best strategy, even though both the public and private sectors would like rates to go down. The private sector would like lower rates so that the cost of investment is brought down, while the government would like rates to come down so that it can pay less in debt servicing.
As the PM noted, inflation for the financial year is 5.9 percent, whereas the corresponding figure for the year before was 28 percent. However, the PM’s unspoken complaint was that the common man was not noticing. Perhaps an important reason is that the consumer, the investor, indeed all economic actors, have gone through several similar boom-bust cycles before. Each time, recovery has been harder, and has had harsher conditions attached to the inevitable IMF bail-out. An important milestone would be the completion of the current IMF programme, followed by sticking to the reforms introduced as a condition. Only then would the man in the street believe that the cycle had been broken. Also, until the economy has picked up enough for young people to get jobs, the government should not expect to be credited.
