Interest rates and impact on the economy.

Byline: Arooj Asghar

State Bank of Pakistan (SBP) is in a monetary tightening phase raising discount rates continuously for the last few months but persistent demand pressure in the economy is forcing it to add certain basis points in this quarter as well. Central bank is taking certain corrective measures to prevent the economy from high inflation, growing circulation of money and probable decline in the growth rate in fiscal year 2018-19. Recent Monetary Policy Statement recognizes that it has missed the current fiscal year's target of money supply growth due to current account deficit and various other foreign exchange challenges.

The State Bank of Pakistan on March end increased the policy rate (interest) by 50 bps to 10.75 percent, which will be applied from April 1. Average headline Consumer Price Index (CPI) inflation reached 6.5 percent in July-February of fiscal year 2018-19 compared to 3.8 percent recorded in the same period last year. Meanwhile, year on year CPI inflation has risen considerably to 7.2 percent in January 2019 and further to 8.2 percent in February 2019-the highest year on year increase in inflation since June 2014. These pressures on headline inflation are explained by adjustments in the administered prices of electricity and gas, significant increase in perishable food prices, and the continued unfolding impact of exchange rate depreciation. Core inflation maintained its 13-month upward trajectory accelerating to 8.8 percent in February 2019 from 5.2 percent a year earlier.

The fiscal deficit for the first half of fiscal year 2018-19 was higher at 2.7 percent of GDP when compared with 2.3 percent for the same period last year. The government has borrowed Rs 3.3 trillion from SBP and retired Rs 2.2 trillion of its borrowing from scheduled banks (on cash basis) during 1st July to 15th March of fiscal year 2018-19.

Banks are currently facing liquidity crunch because of the outcome of the central bank's policy to keep the market dry in fear of inflationary pressure coming out from the outflows of dollars. Most of the loans and advances of scheduled banks are in three sectors i.e. agricultural, industrial and export, which showed a mixed trend after the hike of interest rates. Whereas most of the sectors are reluctant in getting fresh credit lines due to increase in the financing cost. State Bank is attempting to achieve economic stability by varying the quantity of money in circulation, the cost and availability of...