EDITORIAL: There are apparent contradictions in monetary and fiscal policies that are fuelling uncertainty in the market which is partly reflected by the ‘bloodbath’ on stock market, partly by the rise in domestic inflation, and partly by the rise in the budget deficit.
With respect to the monetary policy, the discount rate was raised by 150 basis points to 8.75 percent on 19 November 2021 - a contractionary policy rendered controversial because the difference with other regional countries and in our major trading partners widened; while at the same time, the State Bank of Pakistan (SBP) continued its policy to provide subsidised long-term financing facility for plants and machinery to exporters at 5 percent (cited as the major reason for the massive rise in imports during the first five months of the current fiscal year), as well as under the Prime Minister’s signature programmes, including Ehsaas, housing, small and medium enterprise (SMEs) and Kamyab Jawan loans.
And, the government borrowing from the domestic market has risen from the 16.5 trillion rupees in August 2018 to the current level of over 26 trillion rupees which has been at rates well above the discount rate in recent months – money which is injected back into the economy to meet the government’s expenditure, largely current as development expenditure has reportedly already been slashed from the budgeted 900 to 700 billion rupees.
In addition, it must be emphasised that current expenditure has been jacked up from 3.9 trillion rupees in 2017-18, the last year of the PML-N government, to 7.5 trillion rupees for 2021-22 – a highly inflationary step.
The rupee has been allowed to erode at a pace unprecedented in the country’s history and this is attributed partly to SBP’s poor judgement given that the market determined exchange rate agreed with the Fund allows discretion to the central bank to assess whether indicators including the balance of payments position (which is continuing to show extremely healthy remittance inflows) and international reserves (considered at a healthy 16 billion dollars though at least half are sourced to debt) justify the ongoing rupee erosion.
Reports indicate that the SBP has indicated that it will intervene in the market to check any further erosion and instead use cash margins as the preferred policy tool in future; however, time will tell whether this will be implemented.
In terms of fiscal policy much is being made of the rise in collections by the Federal Board of Revenue though conveniently ignored is the fact that the rise is mainly attributable to the rise in imports which are playing havoc with the country’s balance of trade. And with the expected money bill that seeks to end exemptions valued at 330 billion rupees, many, if not all, would then be passed onto the consumers, plus the decision to raise petroleum levy by 4 rupees till the maximum limit of 30 rupee per litre is reached, policies that are highly inflationary.
However in marked contrast, the Ehsaas programme (budgeted at 240 billion rupees), and the Prime Minister’s Kamyaab Pakistan programme (though actual outlay to be budgeted under this head in the ongoing year has not yet been released) are expansionary which maybe justified on the grounds that they are pro-poor but ignored is the fact that with the rise in inflation due to the money bill, administered price rise as agreed with the Fund, and decisions on raising the petroleum levy, the need to pump more money for these pro-poor activities to ensure availability of essential items remains and would rise each month — money that the government simply does not have.
It is hoped that the contradictory monetary and fiscal policies are replaced to the extent possible which would require the economic team managers to act responsibly with the SBP taking responsibility for non-supply side inflation as well as the rupee erosion, and the Ministry of Finance to request the major recipients of current expenditure to make dramatic sacrifices for the next two years that would minimise its reliance on taxes and utility rates that the general public can ill afford. Pro-poor handouts must also be minimised during the next two years — measures that would bring some semblance of certainty in the market.
Copyright Business Recorder, 2021
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