Daily Times

It’s no surprise that the state bank has had to raise interest rates at this time. But the fact that it had to do it in an emergency session and then raise it by 250 basis points to 12.25 percent was in no way expected. It seems everything from the collapsing rupee to stubborn inflation to fast depleting reserves, while the IMF program is suspended, has forced the central bank to drop its habit of supporting the government’s all-is-well narrative and adopt a super hawkish stance. And clearly inflationary pressures are not just exogenous, though supply bottlenecks and the Russia-Ukraine war indeed cast a long, dark shadow, but also because there was no government over the last few days to check price manipulation typical of the Ramzan cycle.

This is market- as well as investor-negative. It nullifies the government’s efforts, before the constitutional crisis triggered last Sunday, to incorporate an expansionary fiscal policy to win political points at a crucial time. So PTI will have to deal with the political fallout of this move and also answer for the economic damage it has caused. But the first order of business as no confidence formalities are fulfilled, regardless of which government is in power after it, has to be stabilising the economy.

Unfortunately, there is not going to be much room for expansionary maneuver, especially if the IMF program is to be restored. The PTI government put a spanner in the works over the last few days by violating structural adjustment agreements, which led to the suspension of the program, but reviving it now will take a lot of sacrifices in terms of further cutting subsidies and raising taxes. That’s a baggage that no new administration would want to start with. But there’s no other option. Pakistan’s valuations are flashing default level SOS signals in the international market right now, and the country will have to wriggle well to avoid the axe. SBP turning so strongly hawkish is part of the wriggling. *