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The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) couldn’t be serious that the “business, industrial and trade community is shocked” at the way the State Bank of Pakistan (SBP) raised the benchmark interest rate, by 150 basis points (bps) to 13.75 percent, in the last Monetary Policy Committee (MPC) meeting.

You could say that the Bank surprised just a little to the upside because informal consensus did revolve around 100bps, but to expect a cut in this environment makes no sense at all and, if that is really what they were hoping for, also reflects very poor planning on the part of businesses.

And if they only looked out the window, they’d see that what’s happening is very likely to produce so much volatility so soon that even the government’s best efforts to prop up the economy would be highly inflationary because it would have to spend out of its own pocket and do irreparable damage to the current account.

To expect it to cut rates to help businesses at the risk of stoking demand and raising prices even further would throw the economy into a tailspin; something like what’s happening in Turkey. So it’s a very safe bet that SBP’s going to stay plenty hawkish for the foreseeable future, at least.

Yet it’s not as if the Chamber made no valid points at all. Because not very much of Pakistan’s inflation is demand-driven. Almost all of it has to do with unacceptable and unbearable levels of political as well as economic uncertainty, not to mention all the supply-side issues that have dogged policymakers since well before the pandemic. In fact, exogenous factors like the commodity super cycle, especially wheat and oil price inflation, are also really only inflating the cost-push type of inflation.

How long, then, are we going to use interest rates to fight this price rise? A tanking economy, without even the life support of the Fund programme at the moment, and ridiculously high prices that are not responding to conventional monetary tightening will allow you to go with compromised industrial production and export for only so long.

FPCCI is also right that making formal money so expensive for businesses will make a lot of them look elsewhere, given the choice between going belly up and seeking refuge in the informal economy, and raise completely unnecessary red flags at the Financial Action Task Force (FATF).

As for the Chamber’s lament that monetary policy was out of sync with fiscal policy, it’s not going to be too long before that’s not technically correct. The International Monetary Fund (IMF) has made it very clear that the Extended Fund Facility (EFF) would only resume under the original conditions agreed with the Imran Khan administration. And since we cannot survive too long without it, that simply means that the time has come for fuel and power subsidies to go out the window; triggering another round of inflation.

Surely, all chambers and all businesses know that the government can do nothing for them at this moment. It’s only a small blessing that the Saudis are working on extending the oil and loan facility and the Chinese are also expected to roll over another one of their bulky loans, because the state bank is hemorrhaging reserves at a pace that if we’re not back on the right side of the international lending regime very soon, we will for sure be seeing the word default very often in the headlines.

It’s also true that industry cannot be upgraded when it is already under-performing. That means there’ll not only very likely be loss of production and export revenue, but the long process of revamping industry and adding value to exports will also have to wait till the economy gets better.

But the economy’s not getting better. Unable to grow, tax or earn enough to survive on its own, it is desperately dependent on fresh debt just to stay above water. Only now it’s getting more and more difficult to get more debt and since the things we have to do to get it is beginning to hurt industries that get us the little export we can get, it wouldn’t be wrong to say that the economy is circling the drain; and businesses, naturally, with it.

Wait till the next MPS (Monetary Policy Statement).

Copyright Business Recorder, 2022


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