As central banks across the world continue to hike interest rates to rein in inflation (with little to show for it, unfortunately), conventional monetary orthodoxy is being called into question. Central bankers typically respond that ‘it could be worse’ if they just sit back and watch. That is always going to be true. However, curbing the demand-side without stabilizing or shoring up the supply-sideis worsening the cost of living crisis. Perhaps a new approach is needed?

There is now another round of punishing rate hike in the offing here in Pakistan, supposedly to bring down ‘medium-term’ inflation into single digits (no one quite lives in the celestial medium-term universe, by the way). It would be naïve to expect price pressures to abate in the quest to keep interest rates real-positive. Higher cost of borrowing is only going to add to the inflationary headwinds which folks have been facing from the EFF-necessitated hikes in the administered prices of petrol, diesel, electricity and gas.

While the rate hike episodes are unavoidable under the IMF program for a country in debt distress, it needs to be acknowledged that monetary policy’s impact will remain structurally subpar in a cash-driven, informality-driven economy. While the monetary leakages are not a phenomenon for Pakistan, what has become entrenched over the last few years is the system-wide lack of accountability when it comes to curbing practices of profiteering, hoarding, price-gouging and creating artificial shortages (especially in the case of essential food commodities).

When Shahbaz Sharif became Prime Minister nearly a year ago, it was hoped that the ‘administrative’ side of inflation would be paid attention to, so that the market forces of supply and demand could reasonably co-exist for efficient price discovery. The efforts of former Khadim-e-Aala in Punjab had shown that middlemen, brokers and commission agents could be reined in from their excesses, in order to achieve price stability. Helped in part by lower oil prices then, the long run of stable prices in Punjab (the largest market that sets the tone for rest of the country) helped the PML-N’s popularity during its 2013-18 term (subsequently inviting favorable comparisons against the Khan government from 08/2018-03/2023).

Events in the political economy, however, took such strange turns that those harboring expectations of the Shahbaz government knocking a chunky bit of percentage points off the CPI were quickly disabused of such notions. To begin with, the ex-CM looked dazed and confused from the outset, taking a lot of time to assemble his cabinet, and subsequently consuming even more time to make the difficult decisions to slow down the economic freefall that was foolishly unleashed by the Khan government in its last months in office.

Then came the Punjab debacle. You can’t quite govern from Islamabad if you don’t have Lahore. After months of clumsy firefighting, judicial interventions and a series of bad political moves – including Shehbaz choosing for CM spot his own son (who seemed more suitable for behind-the-scenes administration to keep things in check) – took Punjab away from Shehbaz for good, just three months into power. That pretty much was curtains on administrative measures. The Pervaiz Elahi-led government had no political incentive to ensure smooth functioning of markets via product availability and fair prices.

Other avenues of to ensure a fair/functioning supply-side were also left unattended. For instance, opening up the trade with India (embargoed since Modi government’s Kashmir annexation in August 2019) could have increased supply (especially of vegetables, pulses, spices and medicines). Moreover, an effective law-enforcement response at the borders could have stemmed illegal flow of food commodities, agricultural inputs and the greenback to Afghanistan. Going forward, 2023 being an election year, unscrupulous market forces may continue to dictate amid political transitions at the center and provinces.