For Pakistan’s residents, fiscal year 2020 was the worst year as they witnessed highest inflation in the world forcing policy makers to increase interest rate.
“Pakistan witnessed highest inflation not only in comparison with the developed economies but also with emerging economies,” said the Inflation Monitor for April issued by the State Bank of Pakistan (SBP).
The SBP pushed up interest rates to cool down the inflationary pressure during the fiscal year but high rates proved counterproductive as they further increased inflation while the private sector stopped borrowing costly money hampering industrial growth and services.
January witnessed 12-year high inflation at 14.6 per cent. In response to the rising prices, the SBP rose the interest rates to 13.25pc.
However, with the emergence of coronavirus, the entire economic scenario was turned upside down as demand contraction lowered inflation forcing the SBP to cut down interest rates to 5.25pc within just three months.
The rate cut announcement came as inflation slowed down, falling to 8.2pc in May, much lower than the SBP projections for the month.
Detailed graphs accompanying the SBP’s Inflation Monitor show Pakistan’s inflation, when compared to developing economies like China, Thailand, India, Bangladesh and Sri Lanka, has fallen since the pandemic.
The July-May inflation for the current fiscal year slipped below to the State Bank’s earlier projection of 11pc to 10.94pc. The number is expected to drop further in June.
The government has slashed petroleum prices thrice during the two months, which drastically reduced the cost of production, transportation and finally reduced inflation.
In a televised interview, Zubair Motiwala, a known industrialist called on the government to bring down the interest rate lower than 5.25pc to boost economic activities.
Trade and industrial sectors, while demanding cuts to interest rate, also believe the economy needs additional injection of Rs3-4 trillion for full recovery.
However, with sharp economic slowdown, the revenue collection has also fallen short of target this year making further liquidity injection on such a large scale impossible for the government.
The SBP has provided relief amounting to hundreds of billions in the form of principal payments deferrals, debts rescheduling and lending on easier terms for industrial sector to avoid massive layoffs.