50bps hike in policy rate

EDITORIAL: The Monetary Policy Committee (MPC), under the chairmanship of Governor State Bank of Pakistan (SBP), increased the policy rate by 50 basis points (bps) to 12 percent, citing the Middle East conflict and low prospects of its near-term resolution that are keeping global oil prices at persistently elevated levels.

There is overwhelming evidence supporting his thesis; however, it is relevant to note that inflation in Pakistan, estimated at 10.3 percent for September, is the highest in the region with India’s 5.54 percent (6.08 percent rural and 4.88 percent urban), Bangladesh at 8.34 and Sri Lanka at 8 percent.

This raises the question as to the contribution of two administrative measures taken in compliance with the harsh upfront conditions under the ongoing International Monetary Fund’s (IMF’s) 7 billion dollars Extended Fund Facility programme notably: (i) to achieve full cost recovery that has upped the utility rates to levels well beyond those in regional countries; and (ii) massive rise in reliance on petroleum levy for revenue, technically a sales tax but lumped under other taxes, thereby placing it out of the divisible pool, that in the current year’s budget accounts for 34 percent of the total budgeted sales tax collections by the Federal Board of Revenue (FBR) and 11 percent of the budgeted total FBR taxes.

The MPC thinks not and argues rather implausibly that “while the impact of this global shock on the domestic economy has remained contained so far amidst proactive monetary policy adjustment and continued fiscal discipline, geopolitical developments have worsened the inflation outlook as compared to the earlier assessment.”

The 50bps rise was considered sufficient to keep inflation expectations anchored, contain second round effects of the ongoing supply shock and bring inflation within the medium term target range of 5 to 7 percent – the duration of the medium term has never been specified enabling the MPC to keep the target range constant over a couple of years even as inflation has entered double digits.

The operative word is ”expectations” as the SBP relies heavily on sentiment surveys, and noted in the latest statement that inflation expectations of consumers increased (not mentioned is perhaps the fact noted in the World Bank’s recent development report on Pakistan that poverty rate has increased from 22 percent in 2018-19 to 29 percent in 2024-25 indicative of declining labour incomes, high inflation and sluggish growth) whereas those of businesses declined; meanwhile, confidence indicators for both weakened.

In other words, household confidence has declined due to factors that are not only linked to inflation while business confidence has declined due to a steady erosion of competitiveness fuelled by administrative measures, apart from external factors especially the Middle East conflict.

Two observations need to be highlighted. First, while the sum of 21.5 billion-dollar foreign exchange reserves compared extremely favourably with the under 3 billion-dollar reserves in the first quarter of 2023, yet the standard minimum reserves as required by multilaterals/economists, is to provide three months of import cover.

The Statement maintained that “supported by continued foreign exchange purchases, SBP’s reserves remained stable at 21.5 billion dollars – reaching the level of 3 months of imports.” In other words, given the massive rise in the prices of several commodities that Pakistan used to purchase from the Gulf, including fuel, fertilizers, require a much higher level of reserves than even a year ago.

Secondly; the Statement projected Gross Domestic Product (GDP) growth rate at between 3.5 percent and 4.5 percent for the current year.

The one percent margin of error is high and may indicate the fact that data transparency remains low in Pakistan. Be that as it may, the IMF’s projection for the year for Pakistan is 3.5 percent, the World Bank’s is 3.8 percent but the budgeted usually optimistic growth rate is only 4 percent.

The decision of the MPC to project the growth range to 4.5 percent is therefore inexplicable.

The Statement rightly noted that the outlook remains susceptible to multiple risks, including elevated global commodity prices, tightening international financial conditions and supply constraints though it acknowledges that the risks to higher than projected inflation outlook include unanticipated adjustments in energy tariff, further uptick in wheat and allied products prices and adverse weather conditions. This conclusion is reminiscent of a famous quote from Shakespeare’s Julius Caesar: “The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.”

Copyright Business Recorder, 2026