Introduction
On June 25, Pakistan reduced its interest rates – for the fifth time in only 100 days – to 7%, almost half the rate of 13.25% just three months ago. The statement released by the Monetary Policy Committee of the State Bank of Pakistan (SBP) said that this most recent decision ‘should support growth and employment, while keeping inflation expectations anchored and maintaining financial stability.’[1] The business community, however, deemed this latest decision ‘too little too late,’ feeling that a one-time reduction to 4% is what the economy required in order to ‘trigger growth and accelerate economic activities.’[2] The business community felt that the ‘decision makers at the SBP and the governor do not have the perception of ground realities of Pakistan and the serious economic challenges the country will have to face in the near future if growth does not pick up soon.’[3] On the same day, June 25, the IMF issued its own analysis of Pakistan’s growth prospects, lowering Pakistan’s growth forecast by half, to one percent for the next fiscal year (FY21).[4] On April 14, when the coronavirus was still in its earlier stages and 5,837 cases had been reported[5] the IMF forecast the GDP rate for FY 21 at 2%. On 25 June, when the number of cases reached 193,000, the IMF reduced its target for the next year for the GDP to only 1%.[6]
The Government of Pakistan hailed the falling interest rates, ignoring the fact that this fiscal year, which concluded at the end of June 2020, ended up with an estimated negative 0.4% GDP growth rate, the lowest in seventy years. Some stock traders endorsed the Government’s move, saying that ‘[t]his step should bode well for the country’s growth prospects and stock market sentiments.’[7] Another economic statistic much-heralded by the government is the fact that Pakistani imports have fallen drastically over the last fiscal year: the Current Account Deficit (CAD) has declined from around 6.8% of GDP to 4.8%.[8] In May 2019, the Government of Pakistan took out its 13th structural adjustment loan from the IMF since 1980, worth $6.4 million. The main reason for doing so was the high and rising balance of payments crisis affecting Pakistan. There was much jubilation in March 2020, when the pandemic was just beginning, as the Current Account Deficit fell to just $6 million from $823 million a year earlier.[9]
[1] https://www.dawn.com/news/1565154/sbp-cuts-policy-rate-by-100-bps-to-7pc
[2] https://www.thenews.com.pk/print/678257-businesses-want-big-rate-cut-in-one-go-to-rev-up-economy?_ga=2.83775890.563672569.1588245644-1430413245.1539598907
[3] Ibid.
[4] Pakistan’s fiscal year runs from 1 July to 30 June.
[5] https://www.worldometers.info/coronavirus/country/pakistan/
[6] https://www.dawn.com/news/1565089/imf-lowers-countrys-growth-forecast-to-1pc
[7] https://www.thenews.com.pk/print/678034-state-bank-interest-rate-cut-to-bid-well-for-country?_ga=2.51968429.563672569.1588245644-1430413245.1539598907
[8] https://tradingeconomics.com/pakistan/current-account-to-gdp
[9] https://tribune.com.pk/story/2205383/2-pakistans-current-account-deficit-dips-99/