In recent years, the State Bank of Pakistan has been heavily criticized for its handling of the country’s monetary policy. Many economists and analysts have compared the bank’s actions to someone fiddling with a shower faucet, trying to find the right temperature, but only making things worse.
One of the main criticisms of the State Bank of Pakistan is its tendency to maintain negative interest rates for extended periods. This policy has led to the printing of trillions of rupees, which has fueled inflation and put pressure on the formal economy. Despite this, the central bank has failed to reduce the size of the cash-based economy and ensure price stability.
Furthermore, the State Bank of Pakistan has been accused of ignoring obvious signs of inflation, despite warnings from experts. In a Monetary Policy Committee meeting in 2020, the bank categorically denied that inflation would be a challenge in the future, despite clear indications that a commodity super cycle was underway, leading to increased prices of commodities across the board. This lack of foresight and unwillingness to acknowledge the problem has been a major factor in the country’s economic troubles.
The failure of the State Bank of Pakistan to enable price stability has led to a complete and unprecedented disaster. The country currently has over Rs8 trillion in currency in circulation, making up almost 20% of GDP. This has inflated the informal economy, which continues to exert pressure on the formal economy, which is struggling to stay afloat. In addition, a fiscally irresponsible sovereign has refused to mend its broken ways, making the situation even worse.
The situation in Pakistan can be seen as a story of two economies, a formal economy, and a cash-based economy. The central bank has barely used any tool to reduce the size of the cash-based economy. Interest rates are a blunt force tool, and an increase cannot magically bring grey cash from the informal economy into the formal economy. As an increasing quantity of money supply stays out of the system, it will continue to fuel inflation.
Despite successive monetary policy statements targeting a target inflation of 5-7% over the medium term, inflation in Pakistan remains considerably higher than its peers, despite being exposed to similar levels of commodity and price shocks. The medium term keeps being extended into the future, as the central bank continues to lose its credibility.
The recent increase in interest rates by the State Bank of Pakistan has been criticized as too little too late. Interest rates have reached their highest ever level, and there seems to be no plan to tackle the underlying issues that have led to the current crisis. As a profligate sovereign, and an equally aloof central bank push a population of more than 230 million people over the edge, the future looks bleak.
The recent increase in interest rates is unlikely to solve the problem, and it is feared that economic activity will suffer, and inflation will rise further. The unwise continue to burn, and it remains to be seen if the State Bank of Pakistan will be able to steer the country back on track.
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