Dont expect any hurrahs from the banking community on the State Banks latest interest rate hike. And dont expect the central bank to care what the bankers say. It has enough on its plate already. Facing vast inflationary pressures and more pressure still from a government that seems to think that it is the monetary, not fiscal policy that causes inflation, a couple of angry bankers are far removed from what the Governor would be thinking about right now.
On top of Mr Shahid Kardars list of worries would be governments penchant for borrowing from the central bank. By November 19th, in fact, government borrowing from the SBP rose to Rs 266 billion, the total reserve expansion being Rs 308 billion. That fuels not only inflation but the expectations of inflation. Neoclassical economics being the management of expectations, youve got a problem right there, especially considering the speculators in the money markets. The central bank has a couple of tricks up its sleeve. For starters is the obvious hike in the interest rate to suck the excess liquidity off the money markets. Second, it has been lobbying, to successful ends, for an amendment to the SBP Act, to curtail the government borrowing. The drafting of the legislation is in its final stages, and it would explicitly lay out a quantum limit. That might not be a good enough check, though. After all, the Fiscal Responsibility Act also gave a limit for the fiscal deficit as a percentage of the GDP; it was violated by the very government that had introduced the said piece of legislation.
The economies of most countries today are affected by the global recession. The economies of several countries are affected by the war on terror. But Pakistan is the only country that is facing, in addition to the other two problems, one of the most disastrous natural calamities of recent times. These would have been tough times for any government. But the incumbents can affect change, first by cutting unnecessary expenditure and then by finally start negotiating with the military to do the same.