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State Bank’s Recent Policies Made Pakistan’s Economy Worse

ISLAMABAD, January 31, 2023- According to the Economic Advisory Group(EAG), the State Bank of Pakistan (SBP) dollar cap, and policy rates have aggravated the economic crisis, and substantial reforms are needed to promote sustainable growth instead of policies that cause economic instability.

EAG stated in a news release that SBP maintained a considerably negative real interest rate during FY 2022-23 despite the need to lower the external financing gap to a more sustainable level. Pakistan’s forward-looking real interest rate at the start of FY23 was around -7 percent. It was a global anomaly.

According to the International Monetary Fund (IMF) October 2022 Financial Stability Report, Latin America’s forward-looking short-term median real interest rate had grown to 5%. Asia’s median real rate was 1-3 percent. According to Bloomberg, Pakistan had the second-lowest real interest rate in South East Asia in July 2022.

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Despite some misgivings, the EAG approved the 2021 law that gave the SBP more power and established inflation targeting as the monetary policy regime. The SBP has failed to stabilize inflation at 5-7 percent. The SBP’s forecasters’ long-term inflation expectations remain unanchored at close to 9 percent. Long-term government bond yields imply even larger inflation predictions. This implies that the SBP will fail its medium-term inflation objective.

The EAG recognized the need for fiscal-monetary collaboration to achieve macroeconomic goals. It also believed the SBP had failed to use its parliament-granted authority to fulfill its mandate. By keeping the exchange rate from fully correcting without supporting it with an appropriate interest rate stance, the SBP contributed to the instability it was supposed to avert. The EAG found that transparency from the inflation targeting regime’s stated inflation objective holds the central bank accountable.

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