SBP shouldn't downplay this government's failures.

Byline: Nasir Jamal

The State Bank of Pakistan (SBP) kept the key interest rate unchanged at an eight-year high of 13.25 per cent in its last monetary policy announcement, which came a few days late than expected. But that was the easier part of the job because the Monetary Policy Committee (MPC) felt the outlook for inflation remained 'broadly unchanged'.

The harder part for the MPC was to obscure the failures of the government to collect the targeted taxes, control food prices and boost export growth. Perhaps the most difficult part was to convey the message to the people and businesses struggling under harsh economic conditions that GDP growth during the present fiscal year will be slower than the bank had consistently projected since July 2019 and that the possibility of additional taxes before the end of the year cannot be ruled out.

The bank's assertion that the real interest rates - the difference between the nominal interest rate and the headline inflation rate - at the current level of 1-2pc on a forward-looking basis aren't high by any standard means the cost of the money will remain significantly high unless sticky inflation starts falling and comes down from the projected 11-12pc for the present fiscal year to 5-7pc over the next six to eight quarters.

The bank sees no evidence of the materialisation of 'second-round effects on inflation' from supply-side shocks but cautions, if sustained, 'high food price inflation could lead to demands for faster wage growth and to possible risks of a wage-price inflation spiral'.

A central bank can do only so much to revive an anaemic economy

It is something the bank has not touched upon in recent months and cannot be ruled out given the fact that food price inflation is broad-based and long term in nature because of periodic supply disruptions, unexpected shortages and the authorities' failure to control cartelisation and retail prices. Should this happen, the policy rate will stay at its present level for a longer period even if the bank does not jack it up.

On the external sector, the bank pointed out that the current account deficit had contracted 75pc to $2.15 billion during the first half of the present fiscal year owing to a reduction in imports and modest growth in exports and workers' remittances.

What is being referred to as modest export growth actually represents stagnation at best. Nor does the increase in the export volumes without an increase in revenues mean much. At best, the...