By Dr Omer Javed

Copyright brecorder

In its most recent monetary policy statement (MPS), released on September 16 by State Bank of Pakistan (SBP), the policy rate has been kept unchanged at 11 percent due to fears of build-up of inflationary pressures in the wake of floods.

The MPS has apparently based its decision on a contradiction, where on one hand it acknowledges that ‘This temporary yet significant flood-induced supply shock, particularly to the crop sector, may push up headline inflation…’, which means that inflation would likely rise mainly due to flood-induced aggregate supply shock while, on the other, links this inflationary pressure with interest rate, as if it were a demand-driven inflationary pressure, which it clearly is not.

Also, the statement notes, among other things ‘…moderately growing domestic demand…’, which is likely to further slow down due to large-scale devastation of mainly farm economy due to catastrophic flooding; where aggregate demand had already seen a lot of squeezing at the back of around three years of monetary tightening (or monetary austerity).

Reduced aggregate demand has also evidenced from overall medium-term low economic growth equilibrium on average – roughly around the population growth rate — and dramatically increasing levels of unemployment — and poverty levels, and most likely there would also have been significant rise in inequality, given real economy has fared lot less favourably than those earning interest payments.

Hence, real interest rate is still at a whopping 8 percent, and dividends from a narrowly-based stock exchange market have, in turn, received a lot of investment from these interest rate-based earnings.

On the other hand, lack of economic reforms, and needed incentivization has not attracted any significant amount of investment into the real sector as evidenced, for instance, from an overall medium-term paltry performance of large-scale manufacturing and agricultural sector.

Moreover, it is quite clear that a semblance of macroeconomic stability achieved has no deep roots in terms of sustainability, given the accompanying reforms for economic institutions/ministries, organisations, and markets have not taken off in any meaningful way, and stability has been mostly an outcome of economic growth sacrifice that propelled unemployment and poverty due to over-board practice of monetary- and fiscal austerity crushing aggregate demand, and increasing cost of doing business.

At the same time, agriculture sector, and agriculture-based industry in particular — including the export engine, textiles sector – is suffering especially from the ravages of austerity, and neoliberal policy. For instance, under neoliberal policy, agriculture markets, which are highly underdeveloped in terms of anywhere near optimal market clearing capacity were left without an indicative price/government procurement in the case of wheat crop recently.

This, in turn, hurt both farmers and debilitated governments’ capacity to bring down profiteering by releasing supply of wheat when needed. On top of that farm economy has all the more hurt by catastrophic flooding, while government has not much stock of wheat from the previous wheat production cycle to release at a time where prices are rising at the back of apparently artificial shortage of wheat being created in market, increasing its price in turn.

Such level of flooding has not been seen in decades, and has been caused by multiple sources at the back of raging global warming, in terms of cloud bursts, fast-paced glaciers-melting, and exceedingly heavy rainfall, with reportedly close to a thousand people dead, in addition to large-scale loss to crops and livestock, and massive number of people having to leave their homes as apparently a significant number of them saw their material belongings taken away by the floods.

Yet, even this underlying fragile situation of economy has not given much jitters apparently to monetary policy thought process, which, on the contrary, indicated ‘The MPC observed that the economy is on a significantly stronger footing to withstand the negative fallout of the ongoing floods…’ Hence, instead of keeping interest rate unchanged, it should have been drastically reduced, especially given SBP’s own admission in the MPS of a ‘…low inflation environment, moderately growing domestic demand and relatively benign global commodity price outlook. …’

Moreover, it should be noted that inflation has been in single digit since August 2024 – when it was 9.6 percent to be precise — and the fact that interest rate is still in double digits is shocking.

SBP should have loosened monetary policy, and indicated that it will be putting it on diminishing path in a rather quick paced way, as a much-needed forward information for better planning by fiscal policy, in terms of flood related spending, and overall debt management.

A reduction in policy rate in a significant way is indeed very necessary, given the government needs fiscal space to respond to flood-caused rehabilitation, and resilience challenges, which need to be fast-paced as the country is highly-climate change vulnerable. If this is not done, for which there seems to be no economic reason, high interest payments needs will continue to make it difficult for the government to increase spending, which is otherwise much-needed, for supporting farmers not only in their own lives, but also for overall securing food security of the country, and for reducing import needs of essential food items, which are fast-rising, putting, in turn, in jeopardy an already fragile current account situation.

Independence of SBP needs to be revisited, with greater say of government in the monetary policy committee (MPC) – for instance, on the lines as done in Singapore – especially given it continues to significantly remain largely out of touch with finding the right balance of determinants influencing inflation.

Hence, SBP does not overall appear to be on any meaningful learning curve over the years, which otherwise has been quite clearly suggesting, both traditionally that inflation is at least equally a fiscal/governance-related phenomenon in developing countries in general, including in Pakistan, and that the bearing of supply-side factors on inflation has increased, becoming the primary cause in the wake of significantly climate change caused catastrophes — like recent floods – and related phenomenon in the shape of Covid pandemic.

Hence, interest rate needs to be reduced, which if not done so may most-likely contribute to raising inflation through the channel of cost-push inflation.

In keeping its head entrenched like an ostrich in the figurative sands of Neoliberalism, and over-board practice of austerity – which are not dominant explanatory factors on ground of inflation –the monetary policy has continued to run a difficult course for not only fiscal policy, but also has taken interest-related payments to such highs over the years that it apparently became a significant reason for stressing the fiscal relations between federal government, and provinces, with rising calls to find ways to allow government to find more innovative ways to align fiscal allocation of provinces from divisible pool with greater provincial responsibilities.

While there is indeed room for improvement in managing the NFC award, but it has been receiving a significant pressure from high interest payments needs that have meaningfully risen from significantly wrong over-grounding of monetary policy in a neoliberal and austerity policy mindset.

Copyright Business Recorder, 2025