State Bank’s monetary policy

[Lahore_Real_Estate]

Going by the common man’s experience of managing the household budget, the economy seems to be in its last gasps. Prices of essential commodities, especially food items, have been going through the roof during the last year. Although the rate of inflation has declined this year, the cumulative effect of the inflationary trend and the erosion of real income it induced have been too much for ordinary people to bear. This is the reason why the State Bank of Pakistan (SBP) has not changed the key Policy Discount Rate while issuing its monetary policy statement for the rest of this fiscal year. Lowering the interest rate would stimulate borrowing, pumping more money into the economy, and, in turn, encouraging inflation. The decline in inflation is not yet sufficient to allow a loosening of monetary policy.

It has also been indicated by the SBP that the government has exceeded its borrowing limit in this quarter by about Rs 30 billion. It is understandable that the government’s budget is under intense pressure because of the crises born of the ongoing war against terror as well as the refusal of our leaders to adopt austerity measures. It is, therefore, not surprising that the government is inclined towards the easy fix of borrowing from the SBP as well as private banks for meeting its expenses. Apart from squeezing out private sector borrowing, excessive government borrowing and spending may lead to overshooting even the revised fiscal deficit target for the current fiscal year, as the SBP has warned. This is not an encouraging trend, because the fiscal deficit eats into the development budget. The government is trying to manage its current deficits at the expense of investment in our future. Reliance on external aid or borrowing for meeting the deficit is not only compromising our sovereignty but also bequeathing future generations enormous amounts of debt. Currently, the biggest portion of the national budget goes into debt servicing.

However, there are some encouraging signs on the external current account side. Increase in exports during the last two months, steady workers’ remittances and realisation of $ 656 million from the Coalition Support Fund are projected to restrain the external current account deficit to 2.5 percent of the GDP. But an uncertain law and order situation and even otherwise an investment-unfriendly environment has caused foreign direct investment to decline. The precarious security situation has shooed away even domestic capital. As a result, the SBP’s foreign exchange reserves have remained more or less the same, which should be considered a blessing in the present circumstances.

At the macro-economic level, there is a need for caution for some time. The stagflation caused by global recession and increased expenditures due to the war on terror, coupled with the energy crisis, has had a very adverse impact on Pakistan’s economy. The cautionary approach of the SBP in these circumstances seems to be correct. However, it is encouraging that large-scale manufacturing is recovering. Despite scepticism, some quarters are predicting a four percent growth this year, which, if it happens, will be quite remarkable given the global as well as domestic economic conditions. It is inescapable that the government reduce its luxury and lavish expenditures to keep the fiscal deficit under control. If it fails to act in this regard, continuous government borrowing over and above the agreed targets will nullify the State Bank’s efforts to maintain macro-economic stability. *