Business | Markets
Central bank move may not be enough to control prices
Last week Pakistan's central bank again raised interest rates in a bid to tame inflation.
- By Farhan Bokhari, Special to Gulf News
- Published: 00:09 August 3, 2008
Islamabad: Last week Pakistan's central bank again raised interest rates in a bid to tame inflation.
While inflation was just below eight per cent a year ago, it has risen to an alarmingly high level of about 21 per cent, the highest in almost 30 years.
For Pakistan's equity markets, the central bank move and prevailing econ-omic trends, notably the inflation factor, demonstrate just one fundamental reality - rising production costs and an economic slowdown.
As the slowdown bites, there is bound to be increasingly difficult conditions going forward. This essentially means that sales of companies listed on the Karachi stock market are bound to fall in the coming days, further deepening an already troubled economic outlook.
Ironically though, while the central bank's choices were limited, it is possible that the latest interest rise may not have the desired effect. That is largely because part of the challenge surrounding fast rising prices in Pakistan is rooted in the difficult reality of a broken down system of governance.
For too long, the country's successive governments have overseen parts of the trade and industry getting out of control and effectively creating cartels with a strong hold on prices. Consequently, the matter of price increases is not always in line with actions such as interest rate changes by the central bank.
A telling example of the de-link of end results from economic policy actions is often seen in the discord between periodic increase of petroleum prices and a proportionately much higher increase in fares of cabs, trucks and buses.
Similarly, the widespread practice of black marketing often means that prices of essential commodities shoot out of control at short notice without any relevance to the overall economic reality. It is clear that reaction from places like the stock market and important aspects of industry to the central bank's move is without clear justification.
Clear evidence
This is because there is clear evidence of a wider range of stakeholders who must be brought to account for spiralling inflation.
While the set of choices available to Pakistani policymakers is far from easy, it is essential for the country to take clear stock of where the problems for its corporate sector and ordinary consumers ultimately lie. Getting this assessment will be central to making certain that Pakistan is in position to chart a progressive course.
For the stock market as well, management of issues ranging from sudden and uncontrolled price increases to interest rates, is vital for the interest of investors, especially following this year's turmoil.
- The writer is a journalist based in Pakistan.
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