A challenge of Himalayan proportions.

STEERING the economy out of recession in the new fiscal year is a big challenge. An associated and even bigger challenge is to keep unemployment from rising too fast and too high.

The federal government has set a growth target of two per cent for 2020-21 and admits that the country's economy shrank 0.4pc in 2019-20. Eminent independent economists Hafiz Pasha and Shahid Kardar warn that post-pandemic unemployment could rise as high as 16pc for Punjab, 15pc for Sindh, 14.5pc for Khyber Pakhtunkhwa and 9pc for Balochistan. The Pakistan Institute of Development Economics estimates that in Punjab alone 10 million to 12m people could lose their jobs.

The International Monetary Fund (IMF) has projected a scary 4.9pc global recession, which may have huge negative consequences for our external sector. Prime Minister Imran Khan says Covid-19 cases may peak in July-August, which means greater stress on fiscal resources and more restricted economic activity.

It is in this backdrop that the State Bank of Pakistan (SBP) cut its key policy rate by another 100 basis points on June 25, bringing the total easing to 625 basis points since mid-March. The central bank's policy rate now stands at 7pc, down from 13.25pc. The central bank said in a press release on June 25 the priority of its monetary policy had 'appropriately shifted toward supporting growth and employment during these challenging times'. A softer inflation outlook did encourage the central bank to go for the latest rate cut. The SBP says the 2020-21 budget 'is also expected to be neutral for inflation,' meaning it could neither contribute to inflationary pressures nor suppress them.

Whether the latest interest rate cut will lead to accelerated private-sector borrowing from banks remains unsure

'The Monetary Policy Committee noted that with approximately Rs3.3 trillion worth of loans due to be re-priced by early July 2020, this was an opportune moment to take action from a monetary policy transmission perspective.' Translated in plainer words, the central bank believes that the recent rate cut will lead to an increased intake of cheaper credit immediately - from early July - simply because that will be the time for maturity of Rs3.3tr debt taken previously at high rates. Since much of that loan waiting to be re-priced is owned by the government, its borrowing from banks will increase sufficiently, helping it meet its fiscal requirements.

But whether the latest rate cut, just days ahead of the...

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