The state bank rate cut, though larger than immediate expectations, must be the first of a series of steps to ensure money market bottlenecks are removed and the private sector is incorporated in the growth narrative. One, the rate must be periodically revised downward till it settles in the 7-8 per cent range to provide needed buoyancy to growth and employment. Two, targeted fiscal expansion must accompany the monetary easing, bolstering infrastructure and easing unemployment. Three, government debt monetisation that compromised the high interest rate environment must cease and SBP autonomy guaranteed, both by monetary and fiscal authorities. Four, since the easing follows a subtle softening of inflation, relevant authorities must ensure artificial price hikes are not allowed to induce artificial inflationary tendencies, derailing the monetary trajectory just as it gathers pace.
As noted in this space recently, imminent gas shortage has already pushed the fertiliser industry to warn of urea shortage and subsequent food inflation. Considering the interest rate easing, we feel compelled to warn the government that failure to arrest the trend in time, as in the case of electricity shortage, will not only induce another unnatural price hike, but also mandate a painful rethink of the easing cycle, wrongfooting private sector expansion yet again. What such a scenario will do to foreign investment is simple. Policy inconsistency sounds the death rattle for sovereigns with regard to market sentiment.
It may take more than the SBP and finance ministry to ensure smooth continuation of rate reduction. We have noted instances of market heavyweights posturing towards cartelisation, threatening price hikes in essential commodities to bend relevant authorities to their demands. Therefore, the SECP will also have to come to the fore. Presently under a progressive and serious-minded leadership, the regulator should not disappoint considering the importance of the train of events set in motion by Saturday’s generous cut. The state bank has definitely taken the right step, but a lot remains to be done, and success will need sincerity of purpose from all concerned.