PIDE briefs on economic misgivings

PIDEs macroeconomic briefs published this month should be an eye-opener for economic policymakers. Several issues plaguing the economy have been dissected and explained in great detail, highlighting how even some policy measures taken to address key issues - such as reducing government borrowing - may be counterproductive. The countrys economy has been analysed from a fiscal and monetary standpoint on the internal front as well as on the external front. As far as the fiscal side is concerned, election pressure and negligible additional sources of revenues have been contributing towards mounting fiscal strains in the economy. On the revenue side, much of the increase achieved so far is owed to increased sales tax collection on rising imports of petroleum and fertilisers. But, due to the languid performance in most sectors at home, revenue collection from domestic sources is not expected to be as promising in the days to come. Combine that with increased public spending in the wake of the forthcoming elections, expenditure on bleeding SOEs, and the grim state of provincial public finances, and the 4.7 percent fiscal deficit target for FY12 seems like a far-fetched dream. With respect to the monetary policy, the recently reduced inflation numbers may lend some credibility to the tightened stance undertaken by SBP a few months back. However, price pressures have risen from other avenues, such as a weak supply side owing to power shortages, increase in fuel and energy prices and imported inflation due to currency depreciation. At the same time, economic growth prospects remain stunted, making it tricky for the central bank to maintain the dual objective of healthy growth and price stability. Having come under a lot of scrutiny for immense central bank borrowing, the government has attempted to curb borrowing from the central bank. However, in lieu of that, government borrowing from commercial banks has risen and the fact that this was supported largely by liquidity injections by the central bank makes the effort futile, particularly as far as the efficacy of the monetary policy in controlling inflation is concerned. On the external side, dwindling exports, soaring imports due to high petroleum prices, shrinking loan and aid receipts and minimal capital inflows mean the balance of payments is not presenting a healthy picture. Added with the imminent loan repayments to the IMF, the countrys reserves are not offering any respite either, exerting further pressure on an already weakening rupee. Almost all of these problems come with solutions that can be implemented to get the economic house in order. Privatising or restructuring SOEs, boosting tax revenues by broadening the tax base and export diversification are some of these. And its not as if these topics had not done the rounds at policymaking moots. What is needed that is political will and the realisation that a failure to tackle these predicaments may put the economy in a very sorry state?