Monetary Policy decision taken on June 15, halfway around the world, is going to send shockwaves which will soon rumble through our economy. The US Federal Reserve, the US bank which is equivalent of our State Bank, in an attempt to cool down inflation, hiked its policy rate by whooping 75 basis points, which exceeded expectations in the month of May to rise to the highest in more than 40 years, according to official data shared last Friday.
The dollar is on track to touch its highest in 21st century while this year US stocks have fallen discernibly and are now officially in bear market. Wall Street has now warned that the US economy might be entering recessionary period as soon as August. Due to interconnectedness of global trade and financial system the fortunes of the US economy pays a significant part on the rise and fall of almost all other economies of the world.
The fall out of the Fed’s decision will have wide impact on Pakistan’s economy because of its heavy dependence on foreign capital flows and trades which stands particularly exposed. Stocks are likely to promptly shatter, while the rupee-dollar exchange rates will in return further increase for sure. This decline of the exchange rate will make fuel and palm oil even more expensive then the already are. Higher US interest rates will also affect foreign portfolio investments in Pakistan, as individuals and corporations will be looking to the advantage of low-risk returns.
As the US is Pakistan’s biggest trading partner, the impact of this recession will be particularly very severe on the local economy as demand for major exports like textiles, leather and sports goods is very likely to fall. Making export products will likewise get more costly as fuel and power costs rise. Remittances are likewise liable to fall as Pakistanis living abroad are compelled to change their spending in light of ongoing economic crisis. On the potential gain, interest for oil — the primary driver of financial action — and different products is probably going contract, coming about in a drawdown in costs.
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As we head into the new fiscal year all of these and many more concerns should be weighing heavy on the minds of the country’s economic planners. The question is that would the new budget drawn up by the incumbent government be sufficient to meet all the waiting challenges ahead? The government revenues depends heavily on custom duties and taxes that rise and fall with economic activity. There should be no doubt about where we stand as we head straight into the vortex of a major global storm.