SBP's traditional response to high inflation.

Byline: Mohiuddin Aazim

The State Bank of Pakistan (SBP) insists its monetary policy stance 'is appropriate to bring inflation down to the medium-term target (in the) range of 5-7 per cent over the next six to eight quarters'.

On Jan 28, the central bank decided to keep its policy rate unchanged - for the third time - at 13.25pc for the next two months. In 2018-19, the SBP jacked up its policy rate from 6.5pc to 12.25pc - in instalments. Despite that, annual consumer inflation rose to 7.3pc from 3.9pc in 2017-18.

At the beginning of this fiscal year, the SBP increased the rate once again by a full percentage point to 13.25pc - before putting brakes on interest rate tightening. But in the first half of 2019-20, CPI inflation rose 11.1pc year-on-year. The increase in inflation in December alone was even sharper - 12.6pc.

The fact that the SBP refuses to accept that currently inflation in Pakistan is, at least partly, cost-push has added to the miseries of the private sector. Had inflation been really as demand-driven as the SBP believed, it would have subsided somewhat after so much policy rate hikes. But inflation is galloping. And many independent economists and business leaders insist costlier finance is now fuelling it.

The tightening of interest rates should ideally lead to slower growth in the currency in circulation if the transmission of monetary policy is flawless. But its flows grew in 2018-19 to Rs562 billion from Rs476bn in 2017-18.

Economic activities of the fund-starved private sector have slumped, dragging down GDP growth

And, in less than seven months of 2019-20, the currency in circulation has already crossed the Rs500bn barrier, according to the SBP. Faster growth in the currency in circulation, or money circulating outside the banking system, fuels the assumption that the informal economy is growing despite the PTI's tall claims.

The IMF says the economy in 2019-20 is expected to grow weaker than it did last year. SBP Governor Dr Reza Baqir also admitted in his press conference on Jan 28 that GDP growth could be lower than the projected 3.5pc, 'primarily on account of adverse supply-side shocks to cotton production and contraction in large-scale manufacturing (LSM)'.

Lower economic growth in 2018-19 (3.3pc against 5.5pc in 2017-18) has already rendered hundreds of thousands of people jobless - and many more continue to lose jobs daily as the formal economy is not picking up pace. Inflation, meanwhile, remains stubbornly...