Is interest rate hike the only answer?

Last week, the central bank lifted the discount rate to check inflation; the change was pretty much expected.
Damages caused by the floods to the countrys infrastructure and crops, along with rising commodity prices in the international market, heralding higher inflation in the near future, develop a stronger case for further monetary tightening.
It is very unfortunate that the country will have to shell out more foreign exchange on cotton and sugar imports in FY11 to keep its mills up and running. Besides, rice exports will also suffer a serious setback as around 2.39 million tons of rice output has been washed away.
However, analysts are not confident about the monetary tightening doing enough to cure the swelling trade deficit. In an economy where the import structure is highly tilted towards inelastic goods such as oil, petroleum products, capital goods and food items, an interest rate hike will exert negligible pressure on the import bill.
Monetary tightening would be beneficial in a country where demand is overheated and the consumption pattern is largely dependent on loans, which is clearly not the case in Pakistan.
In the midst of all these negative externalities, the only thing that would provide a cushion to the ailing current account is the growth in remittances.
On the heels of a poor security condition and weak sovereign rating, the hike in interest rate is not enough to induce foreign inflows. Poor credibility on the part of government can be gauged from the fact that Pakistans sovereign debt is the fourth riskiest in the world, according to the Global Sovereign Credit Risk Report, issued by the CMA.
Borrowing will nevertheless give breathing space to the capital account, but it is not sustainable, as the government has to counter a high financing cost.
This suggests that instead of clutching at straws, policy makers should adopt more punitive and stringent economic measures. Amid limited revenues, there is a need to broaden the tax base through incentive-based mechanism and speed up privatization of loss making entities, and in turn invest those proceeds on infrastructural development.
There is a need to promote and facilitate public-private partnership in the energy, manufacturing and agriculture sector. Above all, the state must devise a sound strategy and provide an effective system to curb corruption and clamp down on political unrest in order to encourage foreign investments.