Oct 8 - 14, 20

It has been irrational in Pakistan to link inflation with interest rate because the country has witnessed double-digit inflation amid double-digit interest rate. Tight monetary policy has been a failure to control soaring inflation at least in case of Pakistan where the negative impact of exchange rate parity, and increase in petroleum prices, coupled with high power and gas rates, have been making an adverse impact on prices. The country's economy grew by 3.7%, against the growth target of 4.2% set for the last fiscal year 2011-12. The tight monetary policy has not allowed the private sector to play its key part as engine of growth. Under IMF pressure, the government maintained one of the world's highest benchmark interest rates, in an economy hurt by inflation, terrorism and falling foreign investment. High interest rate held back growth and decelerated economic activity. The hike in interest rate actually acts as an upshot to inflation and prices of consumer goods multiply owing to increased cost of manufacturing and doing business. Tight monetary policy dealt a severe blow to the ailing industry bringing the industries on the verge of collapse.

'Economy is showing no signs of recovery despite cut in policy rate by the State Bank of Pakistan in August, according to The Pakistan Economy Watch (PEW), an independent economic forum. The cost of credit is still considered high in business community which barring economic revival since years Reduction in the interest rates have not motivated commercial banks to start lending to the private sector as they still prefer to advance loans to the government. Other reasons behind frustration in the private sector include energy shortages, political uncertainty, inflation and deteriorating security conditions.

The central bank already cut the interest rate in August by a huge 150 basis points (bps) to 10.5%. Critics however say that the rate cut will lead to further government borrowing from the banks, instead of benefiting the private sector, particularly at a time when elections are nearing and the government wants more money in hand to take populist measures.

Decline in Pakistan's headline inflation to 33-month low of 8.79% year-on-year in September compared to 9.05% in August, raised hopes for further cut in the benchmark interest rate by the State Bank of Pakistan, which is scheduled to announce its monetary policy on October 5. There are expectations in the market that the single digit CPI inflation would lead to further cut in the discount rate in the monetary policy for next two months because the soft inflation numbers could allow the room for the central bank to continue the process of monetary easing.

The purchasing power of people has weakened considerably because of persistently high inflation during the last four-and-a-half years of the Pakistan People's Party (PPP)-led coalition government. The country's poor are hardest hit by soaring prices. The experts estimate that the Consumer Price Index (CPI) inflation jumped by approximately 52% during the last four and a half years. Ironically, the ruling PPP of President Asif Ali Zardari had come to power voicing a popular slogan of giving Roti (food) Kapra (cloth) and Makan (house) to the poor. It remained merely a slogan of pre-poll politics even after lapse of four-and-a-half years. The ruling elite are not ready to give up their luxuries and VIP status in a country where every third Pakistani is caught in the 'poverty trap.

The country has assured the International Monetary Fund (IMF) that it would be in a position to service its debt obligations and there would be no balance of payment difficulty in the current fiscal year 2012-13 ending in June 2013. Last week, the IMF team led by country director Jeff Franks held talks with Pakistani officials in Islamabad as part of post-programme monitoring on what basis, the country's future engagements with other lending agencies like World Bank, Asian Development Bank and major donor countries, will be determined. IMF delegation has expressed concern over hefty expenditure on power subsidies taking budget deficit to unsustainable level.

Islamabad's hopes for securing another loan from the IMF dampened after the IMF in its post-evaluation draft report of the previous $11.3 billion bailout programme, has clarified that it will not sign any new short-term loan programme with the country that failed to implement the economic reforms envisaged in the previous bailout programme, which ended incomplete in September 2011. Last week. Pakistan repaid $109.4 million to IMF as a fifth installment against the total $8 billion loan disbursed to the country under the Stand-by Arrangement (SBA) signed with the IMF in 2008. The country in August repaid fourth loan installment worth $397.2 million to the IMF.

The country's external debt dynamics are challenging with $4.6 billion of debt repayment due in the current fiscal year ending June 30, 2013. The total debt has crossed Rs12 trillion with Rs5.02 trillion of foreign loans and Rs7.6 trillion as domestic loans. In 2008, total debt of the country was Rs5.5 trillion and now it has swelled to more than Rs12 trillion. The present government has taken more loans in the last four years than by any other regime since 1985. The country's total public debt reached 60% of the gross domestic product (GDP) by June 30, 2012 under Fiscal Responsibility and Debt Limitation (FR&DL) Act. The government is restricted to increase the public debt beyond 60% of the GDP under FR&DL Act.

Surging poverty level is a daunting challenge for the hugely indebted country with poor economic performance. Though the government has not produced poverty estimates for the past five years, yet a study recently conducted by Islamabad-based Sustainable Development Policy Institute (SDPI) reveals that the incidence of poverty hovers around 33% in the South Asian country where 58.7 million people are living below the poverty line out of the total population of estimated 180 million. Desperation among people is growing due to rise in poverty. Every day the newspapers carry the stories about the poor parents, who have put their children on sale for they cannot meet their basic needs of life. The gap between rich and poor is widening; rich is becoming richer and poor getting poorer. Majority of country's 180 million population is at the mercy of a few people who have and control the resources of the state. The frustration with the worsening socio-economic and unemployment situation is creating a breeding ground for militancy in the country. The worsening energy crisis and slowdown in the economic activities is creating an army of unemployed youth, who are often exploited by the extremist groups.