The State Bank of Pakistan has increased the policy rate from 16% to 17% to tackle inflation and prevent foreign exchange reserves from depleting further. Central Banks worldwide employ monetary tools to manage inflation by controlling demand to prevent economic overheating. However, it is worth noting that the monetary tightening is happening at a time when the economy is already in a recession.

According to the World Bank and IMF forecasts, the country’s GDP growth rate is projected to be no more than 1.5%. Indicators such as petroleum sales, auto demand, and consumer credit offtake suggest a slowdown in growth. Policymakers need to acknowledge that long-term structural reforms are necessary to address these issues.

In Pakistan, the government is the largest borrower. A higher interest rate implies that the government must pay more debt servicing costs, resulting in higher inflation as it raises the tax rate to manage the fiscal deficit. Pakistan does not have a demand problem; it has systematic supply issues, such as low productivity in agriculture and industrial production, a worn-out energy supply chain, and a low tax-to-GDP ratio. Short-term solutions, such as raising interest rates to control inflation, will only exacerbate the problem.

SALMAN AHMED ANSARI,

Tando Adam.