Recent Increase in Interest Rate by State Bank of Pakistan on Nov 12, 2008

Several things are happening in the government whether they are done from Politicians, Senate, Governor State Bank or Bureaucrats. I was reading the news of 2-percent interest rate increase (13 to 15 percent), which was definitely a difficult decision and I was thinking that SBP should have done it before that.
However, I was thinking that our so called intellectuals are always ready to criticize the economic policies. By intellectuals I do not mean professional economists but those people who always appear in the TV talk shows and take calls of economists.
As written in one of the newspaper that according to bankers and business leaders it is done in response to the preconditions of IMF. This might show a negative image of government but if we look in other way that Government deliberately delayed increase in interest rate in view that IMF will have precondition and they’ll again ask us to increase interest rate.
Now we’ll come to another point. A TV talk show criticized the autonomy of SBP without knowing the background of the issue of autonomy of Central Bank which was started in 1983. The core objective is to control inflation at the minimum possible level. Autonomy to the Central Bank implies that the Governor’s primary objective is to control inflation irrespective of what is going on with the other variables including unemployment, GDP growth etc. Moreover, it is also important that the Governor should be conservative central banker who hates inflation.
In another article in the newspaper it is rightly mentioned that lawmakers criticized the government for bypassing parliament in accepting IMF conditionalties. It would have been nice if we decide these decisions in the parliament and senate and tell them the need or no need of loans either by IMF or other international funds and foreign countries. In this way we’ll build a proper system and we’ll educate our parliamentarians about the economic system as well. Another plus point of this system would be transparency if the loan taken and spending will be evaluated in the Senate and Parliament.
Finally, I was really surprised on the statements by several senators who, I guess, should know that point of autonomy. It is quite possible that this government would want to appoint their own Governor instead of Dr Shamshad as her first term is about to complete.
It is important to mention here that decrease in interest rate increase money supply which directly affects inflation in the long run. This long run could be one and half years to two years. Right now our overall average inflation is too high and this is mainly due to the policies of last government and we cannot ignore the fact that it could be due to interest rate decline two years ago. Increase in interest rate will not affect inflation instantly but it might take inflation one year to come down. Dr Shamshad did the right thing by increasing interest rate, though I believe that it should be done at least 6 months ago, considering inflation expectations.