The state bank cut its main interest rate just as suddenly as the government announced shutting down selected localities, and now it is down another 100 basis points to 7pc. This makes it the fifth time that SBP (State Bank of Pakistan) has cut rates since March, when the coronavirus started spreading throughout the country. Before that, even as the economy was already grinding to a trickle – since before the pandemic – and practically everybody who and anything to do with trade, industry or the economy was begging for a cut, to stimulate some sort of activity, the Bank didn’t listen. Now, despite cutting it five times in just around three months, there’s still not much of a reaction from the economy.
SBP has said that this would be the last of the rapid cuts it thought were necessary to offset the downturn from the pandemic. But perhaps this last one was also unnecessary and could be called going a step too far. The economy’s survival at this point hinges more on how soon the government is able to stem the tide of the virus than how much more interest rates can be slashed. For, if they could really breathe any sort of life into the economy in this environment some sort of positive change would have been visible by now. This was, at the sake of repetition, the fifth time that rates were brought down rather quickly. It is also a little irresponsible of the Bank to imply that the monetary policy committee had anything to do with inflation coming down. Prices came down because of the effect of the lockdown and shutting down of the economy.
SBP is clearly worried about the historic contraction in the growth rate. And, to be fair, it has been on the front foot ever since the pandemic came to our shores. It has forwarded some very dynamic proposals to keep businesses from laying off workers even if there is no production. However, it was something of a letdown that commercial banks did not want to play ball until the government provided some sort of sovereign guarantee against defaults and the matter dragged on too long for a lot of businesses to wait any longer. And a number of outlets went bust and workers were sent home. The Bank’s initiatives are welcome, but its policies would be far more rewarding if they make a bigger difference on the ground.