Monetary policy rethink

MONETARY POLICY in Pakistan follows an eclectic approach that often shifts between prioritising price stability and economic growth. Currently, we are trapped in a situation where we have neither achieved low and stable inflation nor desirable economic growth. A transparent monetary policy is one in which the central bank clearly communicates its commitment to a goal — in Pakistan’s case achieving price stability — and how it intends to get there. Credibility is attained when the central bank’s actions are consistent in this direction. However, the State Bank of Pakistan’s (SBP) hard-earned credibility has been compromised in recent years due to its inconsistent monetary policy decisions, necessitating urgent introspection. First Pakistan’s ongoing external sector challenges are a major cause for concern. Between 2013 and 2017, amid low interest rates globally and an IMF programme, the government borrowed heavily from international sources. This unchecked borrowing spree caused external debt, including commercial loans, to rise from 20.6 per cent of GDP in FY16 to 34.6pc by FY23. It set the stage for the transformation of the current account deficit problem into a persistent financial account issue, where servicing past debts requires further borrowing and interest payments to avoid default.