While the State Bank of Pakistan’s Monetary Policy report, ‘Staying the Course’, said good things about the direction in which the economy was going, Moody’s, the international credit rating agency, upgraded Pakistan from Caa2 to Caa1. The positive points about the economy were what must have influenced the upgrade decision, though it would be too much to assume that the ratings agency had an advance copy of the SBP report. It was on the basis of the upgrade that Finance Minister Muhammad Aurangzeb said that Pakistan would get the next tranche of its IMF programme after an IMF team carried out a review in September. There is a certain amount of overlap, because the IMF has, according to many, become nothing more than a credit rating agency, as a country which is on an IMF programme is undertaking the kind of economic reforms needed for it to be able to repay its loans. Credit ratings are essentially meant for banks, to assess the risks of lending, and it was perhaps inevitable that Mr Aurangzeb, whose experience has been in banking, should set great store by them. Indeed, ever since he took office, he has stressed the need for Pakistan to improve its credit rating. This would presumably allow it to approach the money markets more easily
The main danger the Monetary Policy report identified was exchange rate risk, especially high oil prices. That is not only the channel by which inflation could be imported, but something beyond the control of the government. The report also placed greater emphasis on the need to maintain the pace of reform. At the same time, there was no emphasis placed on one of the bugbears of the economy, the revival of growth. It is within that context that Mr Aurangzeb’s statement that there was room for a reduction in the interest rate below the present 11 percent.
A rate cut has implications for growth, but much more certain effects on the government’s debt servicing burden. However, that rate cut will have to be managed only in the context of falling inflation. The out-and-out monetarism of the IMF may be headed for a collision course with the Keynesianism of the government, but at the moment, with the economic engine making the right noises, it seems the best policy is indeed to stay the course.
