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ISLAMABAD: Former finance minister Dr Hafeez Pasha has stated that Monetary Policy Committee’s decision to maintain the policy rate at 15 percent was appropriate in the given economic situation.

Talking to Business Recorder, he stated that there was no need to increase interest rate when the price of oil and other commodities in the international market are declining.

He further contended that a decrease in discount rate would have been inappropriate at this point in time because of low foreign exchange reserves and because the country cannot afford imports.

He said that hopefully inflation would start declining in the country from October 2022 onward and headline inflation would hover between 18-20 percent from existing 25 percent in the next few months. He expressed optimism that inflation would subsequently come down to 10-12 percent.

Dr Pasha expressed concerns at the political situation in the country and stated that foreign investment is not coming into the country primarily due to political instability.

He added that in the absence of FDI, if the government decides to issue bonds, it would have to issue at 22 percent interest rate, which, of course, would be very high.

Former adviser Finance Ministry Dr Ashfaque Hassan Khan criticised the government policy of trying to control inflation through the instrument of policy rate and stated that in countries like Pakistan this approach does not work. He added that inflation in the country is supply driven - increase in electricity, gas and oil prices – and not demand drive.

He said according to empirical studies, one percent increase in discount rate contributes about 1.5 percent to inflation in a year’s time.

Dr Shahid Hasan Siddiqui, a banker and economist said that although the MPC of the SBP has decided to maintain the policy rate at 15 percent, he was confident that it would be reduced in the next meeting of the MPC scheduled on October 10, 2022. He said that commercial banks are investing in treasury bills instead of lending to the private sector and central banks should do something to increase credit to private sector.

Copyright Business Recorder, 2022

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