Pakistan’s policy dilemma

#Pakistans #policy #dilemma

LAHORE: The State Bank of Pakistan (SBP) policy rate decides to keep no change-after maintaining a high record of 22 % in June 2023-the country should be viewed in the context of broader economic challenges and trade relations facing policy makers.

Whether this decision is ‘understood’ depends on the goals that are being preferred: controlling inflation, stability in an external account or economic growth. Although the headline inflation has decreased, the SBP has chosen to maintain rates. However, only interest rates cannot cope with all economic challenges. Under the IMF program, central banks often face pressure to control inflation and to be conservative to build out external buffers. The main reason for holding prices was to maintain rupee stability. Premature rates can lead to a capital flight or more dollars.

Given the continuation of the ongoing financial slips and subsidy programs, only monetary rigor can be inadequate. Since SBP has a limited influence on financial policy and public subsidy, it relied on monetary policy as a precaution to avoid prematurely.

The decision has both benefits and defects for the business community. In the short term, more borrowing costs continue to suppress private investment, especially in the capital sectors. Working capital financing is expensive – especially for SMEs and exporters who face delayed recipients. The key sector such as real estate, automobiles, construction and manufacturing is suppressed due to high cost of credit.

During a long period of time, this effect is likely to blend. If the rate hold is permanently contributing to the disinfection and the stability of the rupee, it can improve investors’ confidence. However, without the same financial reforms, high rates can reduce industrial production and stall economic activity.

High interest rates support the rupee, discouraging speculation, discouraging speculation, and attracting remittances and hot money in T-bills-as has been seen in recent months. But if the original sector weakens under the weight of these rates and external financing increases, the currency pressure can be returned. Support for interest rates is not sustainable without integrated financial discipline. Now it is the responsibility of the government to implement transparent reforms and restore financial stability.

The current policy stand also has challenges for exporters’ Lallencies. High interest rates increase the cost of financing exports, which makes Pakistani goods less competitive. Exporters, especially in textile and engineering, face margin compression, especially when regional colleagues like Bangladesh and India offer credit and energy.

It said, a stable rupee helps to reduce the loss of exchange rates for exporters, and inflation can stabilize the input cost, which can partially meet the effects of high financial support costs. The decision to maintain SBP prices can be justified by a stability point of view – especially in the light of the IMF’s careful approach and inflation and currency fluctuations.

However, this approach is at risk of suppressing the real economy and delaying business confidence, investment and recovery in exports. There is an urgent need for an integrated policy mix – financial hardship, tax reform, and combination of targeted export concessions. Without it, high interest rates can spoil the stagnation and worsen the chances of medium -term growth.