The interest rate on Friday was raised by 100 basis points to 16 percent, the highest since 1999. While it is true that inflationary pressures have been stronger and more persistent, these adjustments come at a time when commodity prices are already very high. There are now fears that this hike will continue to push the cost of businesses and consumers will feel these pressures in higher food prices. All of this, in addition to the expected Sukuk bond payment and increasing IMF expectations is worrying.
This hike also reflects extra pressure amid rising dollar values, shortages in services and commodities such as gas, and unavailability of dollars in the market. Even now, the central bank has stated that post-disaster needs assessments have been incorporated and FY23 is set to see a growth of around 2 percent and along with a $10 million account deficit.
It must also be remembered that IMF conditionalities and lender-mandated actions will continue to contract economic growth. Because of this interest hike, traders have already pulled out investments in panic. This continues to disrupt our balance of payments and forces the government to increase taxation. In a post-disaster struck economy, added taxation measures will add to existing commodity prices. A projected increase in addition to October, which saw a rise of 26.6 percent in year-on-year headline inflation, is disastrous for the public. Likewise, energy and food prices have risen by 35.2 percent and 25.7 percent respectively. These inelastic commodities are used by citizens the most so further increase will make day-to-day proceedings very difficult for households.
When the demand for goods and services declines, prices are set to follow suit and an increase in interest rates may hope to achieve the same effect in the long term. However, monetary policies can take years to materialise and are unlikely to offer immediate relief. For the time being, the price of inelastic products is rising, and this update might make the situation more dire. While it is true that inflation is a globally driven phenomenon, the government and central bank should have considered an earlier time to make these adjustments. Aggressive monetary policy is difficult to manage but it must be hoped that the MPC will closely monitor developments and lift pressures when necessary.