The SBP which had been hemming and hawing about cutting interest rates (even though wasn’t hiking them either) due to rampant inflation has finally decided to cut its key interest rate. This cut is an acknowledgement that the government has succeeded, more or less, in keeping that rising red line in check and reducing borrowing. Hence, the SBP saw it fit to give it some leeway.
But what does this mean? Is it good news or not-so-good news? Well, it could be either. After all, the interest rate is but one variable in a composite, multivariate equation. There’s not just the national socio-political context that has to be factored in but all sorts of international political (availability of aid, bilateral relation with donors) and economic (price shocks, global recession) errata: an elaborate juggling act for the economic mavens.
The step is indeed ‘welcome.’ Our growth has been jammed at a paltry three percent. This spells disaster for the unemployment part of the stagflation curse that afflict us. This cut could spur some much need investment and consumption that could subsequently lead to an increase in growth. Moreover, this rate was being kept high to keep inflation on a leash but it can be debated that inflation is not purely a monetary phenomenon and hence, does not need such monetary checks. True, we are looking at some increase in inflation but that would be the ‘good kind’ of inflation – not the demonic blight that our media would convince us that it is.
But this step needs to be treated with some cautious optimism. It may spur economic activity but then again, it very well may not and we may fall headlong into the liquidity trap. Economic management has a fiscal component too. Now that this cut is in place, it is the government’s job to provide the conducive environment for investment. This means investing in infrastructure, ensuring law and order and cleaning out its Augean fiscal stables. Given the fact that we were living with no electricity a few days ago, this could be asking for too much. The latter, in particular, would require taking some necessary but unpopular steps (like increasing the tax-to-GDP ratio, phasing out unsustainable subsidies) and with elections nigh, this would be a fool’s hope. The SBP has done its part. Can the government? Place your bets with your money, please.
