Govt compromises on economic growth

[LahoreEstate]

KARACHI: This year the government has compromised over economic growth by choosing measures designed to help control inflation, according to economic analysts.

They said last fiscal year was a good example of compromising the economic growth over inflation. The fiscal year 2008-09 witnessed an average inflation of 20 per cent and the government decided to a keep low economic growth with lowest demand.

‘The government did not take a risk to go for higher economic growth last year, fearing that higher inflation may take a shape of hyper inflation, while this year fears of inflation are dominating economic managers,’ said a senior banker. He held the State Bank responsible for poor economic performance, especially when it failed to control inflation last year.

‘This year IMF has reservations forcing the country to remain within fiscal space which means less development spending, and the IMF also suggests to bring inflation to single digit that means it discourages even private sector,’ said the banker.

Abid Saleem, a research analyst, said the government fears cost-push inflation in the wake of higher electricity and rising oil prices.

He said the government has no way to deal with this inflationary pressure coming out of the two sources.

The only way is to force economic participants to minimise use of electricity and petroleum products which means less economic growth.

The State Bank in its monetary policy on Sept 29 also hinted that the government would have to compromise over economy as the two inflationary forces, electricity and oil prices, could once again push inflation higher than desired by the government as well as by the IMF.

‘The effect of cost push shocks, like electricity and oil, on inflation may be neutralised by below capacity economic activity and slow aggregate demand,’ said the SBP monetary policy report.

Both CPI and core inflation declined further in August 2009, with former at 10.7 per cent and non food non energy measure of the latter at 12.6 per cent on year-on-year basis. But the pace of decline in inflation was less than expected.

‘The monthly increase of over 1.5 per cent in CPI inflation in the first two months of FY10 is still quite high and is of concern,’ said the SBP.

Analysts said compromises over economic growth mean increasing hardship for the poor and middle class.

Cost-push inflation has been accepted by the government by ignoring rising poverty, joblessness and crime.

Last year the economic growth was just 2.5 per cent while this year expectation is below than last year.

Private sector has slashed its economic activities as reflected by their borrowing from the banking system.

Private sector made net retirement of bank debts during the first quarter of the current fiscal year and the situation was almost same during the last fiscal year ended on June 30.

The government is net borrower of commercial banks while the ministry of finance has gathered about Rs330 billion through treasury bill auctions from banks.

Most of banking liquidity is being used by the government which often goes for non-productive spending.

‘The State Bank did not bring down the policy interest rate despite sharp decline in inflation which means it will continue to follow tight monetary policy, making cost of doing business higher or in other words discouraging private sector to play a key role for economic growth,’ said another banker.

http://www.dawn.com/wps/wcm/connect/dawn...th--szh-08