- Moving into stagflation?
A formal agreement between the IMF and the government is yet to be signed. It appears that the Fund is getting its undeclared conditions implemented in advance through its representatives in Pakistan.
It is the duty of the SBP to announce the bank rate keeping in view the entire economic spectrum and without being influenced by a particular interest group. The way an extra high bank rate has been announced would benefit only the banking sector while badly affecting the livelihood of the common man, discouraging investments and bringing down agricultural production. The man in the street was already reeling under the inflationary impact of the steep fall of the rupee. The bank rate is usually hiked to bring down inflation but in view of the plethora of negative economic factors at work, the SBP should have avoided the hike. The steep climb in the bank rate by 150 basis points to 12.25 per cent would add to inflation which is predicted to attain new heights in 2020, further reducing the buying power of the common man.
Industrial production would shrink. With the present State Bank rate the commercial banks are likely to lend at the rate of 16 percent which, after the inclusion of insurance costs, could even go above 20percent, a rate no investor can pay and still keep his enterprise profitable. This could even lead to capital flight.
Agricultural inputs would become costly with the rise in power and oil charges and skyrocketing prices of imported fertilizer and insecticides. This would bring down agricultural output and add to rural poverty and unemployment.
With the government barred from borrowing from the SBP, it would have to rely on commercial bank loans at super high rates for budget financing through Pakistan Investment Bonds (PIBs) and treasury bills. As the government revenue is not increasing at the pace of the rise in expenditures the budget deficit will continu to swell substantially instead of coming down as desired by the IMF. Debt servicing will thus remain the fastest-growing item in government expenditure in days to come. Whether the PTI government will be able to weather the storm of protests from practically all section of population, remains to be seen.
