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Some say it was stubborn food inflation that forced SBP’s hand at the MPC, combining with the usual Ramazan effect and typical incompetence of price monitoring committees to rule out a dovish shift in monetary policy. Others say it was because an IMF delegation was in town to decide about the final tranche of the SBA (standby agreement). And since the Fund likes high rates in client states being given structural adjustment treatment, we played along to keep the money flowing.

You’d wonder why the IMF would advocate central bank sovereignty as a key part of its bailout engagement and then also want to manage interest rates. But you’d have to look no further than last summer for the answer, when PM Sharif held urgent late night talks with the IMF chief in Paris to hammer out the SBA when the EFF (Extended Fund Facility) stopped dead in its tracks – thank you Ishaq Dar – and the next day, rather night, the SBP held an emergency unscheduled meeting of its own and raised rates by a good 100 basis points.

That got us the SBA, tamed Pakistan’s CDS (credit default swap), and pushed the threat of default at least nine months (the duration of the program) into the future. But it also kept households, suffering under cost-push inflation, and industry, suffering from high rates that could do nothing about cost-push inflation, properly crippled.

The prospect of higher rates and improving fiscal conditions is never a clear path. Besides, this was already a very tricky situation. All the turbulence and devaluation of the preceding couple of years did not follow macroeconomic script; it did not promote exports, did not support job creation, and did not raise sovereign tax revenue. And the highest interest rates in history did not attract much risk capital either. Instead, they smothered the very exporters the country depended on to trigger growth and employment once stability was achieved.

It seems the industry expected a cut at the last MPC in late January. The caretaker setup was doing a good job of cold heartedly implementing all “upfront conditions”, so the SBA was pretty much in the bag. But, just when the time for measured growth seemed around the corner, those “upfront conditions” snaked into the tax and tariff regime and stoked cost-push inflation, forcing SBP to stay put at 22 percent.

So they turned their hopes to the March conclave. But by the start of Ramazan it was clear that retailers were defying orders and inducing artificial inflation in staple food, of all things, with authorities comfortably asleep at the wheel. And either that, or to keep IMF happy (if you believe conspiracy theorists), sufficed to keep rates at record high, where they have been since July 2023.

It’s a shame that Pakistani industry will remain priced out of the regional market because of a combination of high cost of energy and money (interest), compromising production, export, employment and wages back home, just to stay on IMF life support and keep from defaulting. It would have been much better to wind up the SBA and head into the next EFF with better export and growth figures, which needed lower interest rates, but this mother of all ironies promises us only the kiss of death to keep us alive.

Yet blaming IMF is not right even if it is in fashion. Things would not have been nearly as bad if we only had a fair tax structure and government departments could sort out wholesalers and retailers that have made a habit of exploiting helpless consumers to make their usual profits.

Nothing changes because we don’t change. And so long as the biggest fish and holiest cows remain untaxed, and price committees allow retailers to fleece consumers already broken by record inflation, all the fiscal support in the world will only barely keep us alive.

Nothing more.

Copyright Business Recorder, 2024


Comments are closed.

KU Mar 21, 2024 11:38am
Jafry Sb., the time has come to write about the rampant theft of electricity and gas. Understandably, it would be a sort of leap of faith to expose the corrupt-fest, but the people need to know.
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Az_Iz Mar 21, 2024 05:16pm
Bring the interest rates down,then consumption will increase, which means more imports, when there is no money to pay for it. And the IMF should just write the checks to pay for it?
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Az_Iz Mar 21, 2024 05:19pm
If you are drowning in debt,but want to keep spending,banks will not keep lending money.They want you to trim your spending,so you become more financially viable, then the bank will lend money.
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Az_Iz Mar 21, 2024 05:23pm
We want to keep living like before.We will keep spending,even if we don't have the money.We want brotherly support from GCC and China.And also IMF should just write checks.This mentality has to change
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Az_Iz Mar 21, 2024 05:25pm
When interest rates were down,exports didn't go through the roof. The gains are pocketed,and invested in real estate.
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Az_Iz Mar 21, 2024 05:29pm
China,Indonesia,India,Bangladesh and Pakistan all started out equally poor.The average savings rate over the past 3 decades,was 30% for all,except Pakistan at 15%.Only Pakistan lagged behind.
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Az_Iz Mar 21, 2024 05:32pm
If you save more,then inflation will go down,and interest rates could come down.No one wants that.Someone should just write checks,so the country can keep spending,and keep getting deeper into debt.
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Az_Iz Mar 21, 2024 05:35pm
Over the decades,if the country had saved like others,at similar stages of development,and the government had generated revenues like it should have,there wouldn't have been a need to blame IMF.
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Az_Iz Mar 21, 2024 05:38pm
In India,8% of electricity generated is used by households.In Pakistan 47% of electricity is used by households.People want retail stores to stay open past midnight.We don't care.Just write checks.
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Az_Iz Mar 21, 2024 05:42pm
Retail stores should stay open past midnight.Half the electricity is used by household.Petrol should be sold at half the price.Want cheap gas and food.Don't have money for it.Someone just write checks
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Az_Iz Mar 21, 2024 05:56pm
Petroleum levy will generate about $3.5 billion in revenue this year. This wouldn't have been possible without pressure from IMF.
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Az_Iz Mar 21, 2024 06:02pm
Out of 60 million households,just the top 2% could be owning houses that are worth more than $200k.If each one is made to pay 1% yearly personal property tax,it will net $2.4 billion in revenue.
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Az_Iz Mar 21, 2024 07:59pm
In the ast 4 years,Pakistan's exports and remittances went up from $45 to $60 billion,yet it cannot manage what it earns,and has to goto IMF,complaining about the harsh condition.
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Az_Iz Mar 21, 2024 08:04pm
BD has made progress with mostly garments exports.Pakistan's exports and remittances also have gone up from $45 to $60 billion in last 4 years.Yet it cannot manage.
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Az_Iz Mar 21, 2024 08:11pm
If IMF gives,a $50 billion loan,with no conditions.Guess where will the country be in a couple of years.Worse than today,with more debt,and nothing in reserves.IMF will be blamed,for no oversight.
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