Daily Times Editorial May 25, 2015

Interest rate cut The State Bank of Pakistan (SBP) has slashed the discount rate by an unexpected 100 basis points to seven percent, the lowest interest rate in 42 years. The new rate will continue for two months, with the SBP carrying out its review of monetary policy bi-monthly. The relatively radical cut is clearly intended as a stimulus to economic growth in the presence of slowing inflation. GDP growth has improved marginally to 4.2 percent from 4.0 percent last year. The SBP has been incrementally slashing interest rates since November 2014 from 10 percent to seven percent now, with cuts of a 100 basis points in January and 50 basis points in March this year. The incremental approach was informed by watchful anxiety about inflation. The SBP seems more confident now, based on the latest inflation data. The Consumer Price Index is at 4.8 percent for the first 10 months of FY15, reflecting the average of the steep fall from 8.2 percent in June 2014 to 2.1 percent in April 2015. Adding to the SBP's confidence is the positive direction the macro-economic situation is moving in, halving of the Current Account deficit to $ 1.4 billion during July-April FY15 compared to the corresponding period last year due to contraction in imports led by sharp decline in oil prices and strong growth in remittances, overshadowing lower surplus in capital and financial account and weak foreign private investment. The SBP also announced a narrowing of the interest rate corridor from 250 to 200 basis points, which means a floor rate of five percent, keeping the 'SBP target rate' 50 basis points below the ceiling rate, and ensuring the overnight rate remains close to the target rate, which would now be called the 'Policy Rate'. The SBP obviously hopes to boost economic growth, promote large scale manufacturing, and use the opportunity afforded by economic improvement to implement reforms that would ensure sustainable growth. Although the SBP bolsters its claims of economic improvement by reference to Pakistan's upgraded international credit ratings and investors' confidence, by its own admission private foreign investment remains shy. Despite its incremental easing of the tight monetary policy over the last seven months, the SBP cannot deny the failure of bank borrowing to rise. In fact it fell sharply from Rs 292 billion last year to Rs 161 billion this fiscal year. Part of the explanation for this fall may lie in the discouraging factors of terrorism, law and order, and the availability and prices of gas and electricity, as pointed out by the SBP itself. The SBP can find satisfaction in the build up of the net foreign exchange reserves with it from $ 9.1 billion on June 30, 2014 to $ 12.5 billion on May 15, 2015, but for the ordinary citizen, all the 'good' news from the economic front means little. For one, slashing the interest rate may or may not prove an adequate stimulus to economic growth, based on global experience during the ongoing recession. At the same time, it will reduce the return on savings, including bank deposits, to one percent or even less above the inflation rate. The only saving grace may be the undeniable reality that avenues for safe investment with adequate returns remain few and far between, with the notable exception of the evergreen real estate sector. The economy's macro indicators may indeed be showing signs of improvement, but this has yet to translate into employment and other benefits for the ordinary citizen.