THERE has been a strong reaction to the cut of 75 basis points in the policy rate announced by the State Bank of Pakistan on Tuesday, with industry leaders decrying the move as ‘too little too late’. As demand and cash flows at businesses plummet, people deserve to know why the State Bank is continuing to approach the question of the interest rate as if it is business as usual. Even without the coronavirus-related challenge and the sharp slowdown in business activity that has resulted from the fight against this menace, the market was expecting a rate cut somewhere between 50bps and 100bps. As it turns out, the bank has met the market midway within the expected band. But industry leaders say that times are now extraordinary and they need further support to keep the economy afloat. They point to central bank actions in the US and other jurisdictions where rates have been cut sharply to argue that a large-scale stimulus now needs to be worked out to prevent economic collapse and the resultant unemployment.
These are indeed extraordinary times and the challenges of the day do call for the commitment of more resources. But the State Bank should resist the pressure from the business community that these resources be spent on them in the hope that they will keep jobs intact with the assistance. Instead of lavishing scarce fiscal and monetary resources of the state on the business and industrial elites of the country, the government and the central bank should target this assistance to the poor and the health authorities; this is where help is needed more than anywhere else. The State Bank’s decision to provide financing support for the procurement of ventilators is one example. The Benazir Income Support Programme can also be used to ramp up targeted assistance to the poor, for awareness-raising as well as material support in the coming days. But providing the rich with a ‘stimulus’ in the hope that this will result in job creation or income support for the working poor should not be the strategy.
With that in mind, the State Bank did the right thing to implement a meagre cut in interest rates at this time. The other countries that are using the monetary lever to stimulate their economies are not in the midst of a massive adjustment and can afford their respective stimulus programmes. But a stimulus of that sort in Pakistan, especially in today’s context, will do little to support the working class and the poor, and, in fact, could inflict significant damage on the economy through greater exchange rate stress, widening fiscal deficit and depleting reserves. If we are to commit our resources so painfully accumulated since the adjustment began, it would be better to target them directly to the poor.
Published in Dawn, March 19th, 2020