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State Bank’s monetary policy
May 27, 2011
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The recent monetary policy of State Bank of Pakistan (SBP) has once again stressed on the government of Pakistan to eschew heavy borrowings, lest it could/would be difficult to maintain external debts over continuous bar of IMF on its any standby (financial) arrangements with Pakistan. The report also advocates great care in considering the basic equilibrium of payment schedules, in view of global cotton prices and a stable U$.100 oil tariff, which could otherwise pose problems. Meanwhile the Budgetary deficit of 2011 could increase by 0,7% of GDP, due to rotating electricity debt, instead of previewed target.
This would necessitate a massive increase in private sector production and investments, which is only possible by eschewing any further heavy and unnecessary borrowings, facilitating effective implementation of financial reforms. This is not the first time that State Bank has ever stressed on these very measures, as SBP has always been closely monitoring the ever-changing economic condition of Federation; while the incumbents seem bent on behaving irresponsibly.
The current economic outlook of Country presents a mixed situation, while continuous morbidities of skyrocketing inflation, weak economy, and investments are ever present. SBP is trying its level best to work relentlessly on various aspects to enhance the agro-economy of the Country, in order to maintain equilibrium. One should not rely solely on foreign remittances, since these are definitely variable, while any deviations from baseline benchmarks can suffocate foreign-based revenues.
Governmental borrowings from banking sector have reached astronomical heights, while decrease in partial foreign investments has increased partial financial deficit. The main causes of this could be attributed to devastating floods, overwhelming security expenses, and en masse spending of Rs120 billion over rotating electricity debts. The borrowing volume of government for dealing with revenue expenses was approximately Rs.614 billion, which amounts to annual growth of 28.3%. The 80% increase in revenue was made only possible by borrowings by SBP. Majority of revenue is being wasted in balancing heavy borrowings of Rs112 trillion worth of loans as they stood on March 2011. It also seems that the less than 4% of growth during past four years is more than the ever-decreasing net investment in private sector. This is due to undue borrowing for totally useless and unproductive measures.
Both this and the energy crisis were influencing this negative trend on any growth and productivity of Country’s economy. This goes on to prove that the productivity differences, i.e overall demand and supply gap was widening, making it difficult to cope with inflation. Despite the fact that it seems as if the economy growth rate had otherwise been balanced, alongwith-increasing debts, this is definitely not the ground reality. The only way to cope with this anomaly is wide-ranging reforms which should enable the economy to retreat back to financial prudence and limits of Renewed loan act of 2005; especially there is a strong need for increase in tax and single digit rate.
Meanwhile new steps are being contemplated for the budget of FY 2012, which would but help enhance previous steps. However the electricity-generated deficit would be likely to keep the deficit at an increase of 0.7% as compared to otherwise designated target of 5.5%. The final result would depend on returns of FBR (Federal Bureau of Revenue) and Provincial revenues. The financial issues can only move forward effectively in case there is a dedicated effort to increase revenues by enhancing the tax net and remove any deficient bottlenecks in this regard. This would also require relinquishing measures causing problems in revenue generation.
The renowned economy expert, Dr, Shahid Hasan Siddiqui, while commenting on Pakistan’s monetary policy, has opined that due to failed financial policies of the Country, more than 2200 billion rupees (U$. 25 billion) has been laundered abroad since 2007 Any failure of rectification of the issue could very well cause civil war in the Country, in which h poverty and famine stricken masses could very well react with fury.
He termed the monetary policy as a bid to control the skyrocketing inflation, and enhance the economic outlook of the Country. But consider the fact that the growth rate in 2007 was 6.8%, which by current 2011 has decreased to 2.4%; while the inflation, which was 7,8% has since skyrocketed to 15%.
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