By the time this article is published, Pakistan mission led by Finance Minister Dr Abdul Hafeez Shaikh will have completed Article-IV annual review of the outlook for the economy with International Monetary Fund (IMF) in Dubai, and the brainstorming on monetary policy stance hopefully will have entered final stages amid rapidly changing monetary aggregates giving the central bank room to uphold its current policy stance.
It seems obvious from the changing behaviour of Finance Minister witnessed at a recent pre-Dubai-talks meeting held in Islamabad, that Ministry of Finance will soon start taking some urgent corrective measures to make federal government's fiscal stance compatible with central bank's moves. This is necessary given the present state of Pakistan's economy, which cannot afford to adhere to its fiscal chronicles any more.
It's good to note that realising the pre-Senate election challenges and tough days ahead amid growing harsh criticism on fiscal mismanagement, the Ministry of Finance is now wholeheartedly welcoming the suggestions and proposals from independent macroeconomists and monetarists with the consent of the President.
In a rare show of fair consultations in Pakistan, Finance Minister Dr Abdul Hafeez Shaikh chaired an unusual but important meeting in Islamabad with former governors of the State Bank of Pakistan before he proceeded to Dubai to meet IMF officials for annual review of the economic outlook of the country.
A source privy to the matter said that three former governors Dr Ishrat Husain, Dr Shamshad Akhtar and Salim Raza attended the meeting and gave valuable suggestions to Finance Minister. Dr Ishrat Husain and Dr Shamshad Akhtar who headed country's central bank for a cumulative period of nine years till end-2008 during the era of ousted President Musharraf shared the lessons the economy learnt from the policy initiatives taken during their tenures. The newly-appointed SBP Governor Yaseen Anwar and other officials from Ministry of Finance were also present on the occasion.
However, Shahid H. Kardar who had cited differences of opinion on policy actions as reason to resign from the position of SBP Governor in mid-July 2011, was not present at the meeting. He was either not invited or he did not choose to share his views on the current states of affairs in the economy.
People, who are being encouraged to share their candid views on the state of the economy with the Finance Ministry, opine that government now seems to have taken serious notice of the growing perception that Pakistan is heading towards a possible economic meltdown amid growing despondency and inflationary expectations.
It is really disturbing that despite assurances and the political resolve to contain borrowing through banking system, the net government sector borrowing remained Rs 630.18 billion during the period from July 01, 2011 to November 04, 2011, showing a disturbing and another gigantic increase of 164 percent as compared to a net amount of Rs 238.82 billion borrowed from banking system by the government during the same period last fiscal year ie, from July 01, 2010 to November 05, 2010. With the increase of this 164 percent, the stock of net government borrowing surged to Rs 3650.692 billion on November 04, 2011 from Rs 3020.510 billion at the end-June 2011.
However, what comforts many in this situation is the fact that the growth in broad money (M2) slowed down to 0.93 percent (Rs 62.102 billion) during the period from July 01 to November 04, 2011 as compared to 2.79 percent (Rs 161.278 billion) growth in the corresponding period of last fiscal year ie, from July 01 to November 05, 2010.
There should be in principle agreement between Finance Ministry and SBP that huge budget deficit and domestic financing to bridge this deficit will further escalate the inflationary expectations, going forward, aggravating the economic equilibrium, if deficit financing is not timely diversified, inland revenues are not increased and budget expenditures are not effectively curtailed. Some crucial corrective measures by the Finance Ministry now must be seen in this direction to reaffirm the change in governance attitude that the whole nation must also be cognisant of.
The necessity of diversifying the government financing from domestic financial sector to other sources to bridge the fiscal gap rests on a simple understanding that if the status quo on the fiscal side continues, then the fiscal deficit cannot be financed through other resources. Hence, the central bank will have to keep printing money that will further engrain the inflationary expectations in the economy, going forward.
Now, it should be realised that in the case of Pakistan where fiscal policy is dominating the monetary policy stance, a softened monetary policy may entail more adverse effects in the long run than the short-term gains. With less-efficient tax collection and limited sources to external financing, this view must be taken seriously as the fiscal deficit also has a corresponding relationship with inflation through the balance of payments (BoP) effect.
Empirical evidence in the case of Pakistan's economy presented by independent macro-economists and monetarists suggest that monetary policy, even if it is further eased, is unlikely to permanently cause an increase in level of real output and reduction in unemployment. But, since the money creation will not likely to correspond to an equal or a gradual increase in real output in the economy, hence, the SBP's further softened monetary policy stance may discourage savings and heat up the aggregate demand in the economy sans corresponding increase in the production of goods and services.
It is expected that after the Article-IV annual review of the outlook for the economy by International Monetary Fund (IMF), Finance Minister will make some crucial moves in this direction. In the wake of this situation that is fuelling the inflationary expectations in the economy, the President is rightly expected to assign Dr Shaikh the task to come up with profound remedial steps to improve the economic governance in consultation with independent economists, including former governors, State Bank of Pakistan.
For many who believe that a PhD in economics and author of many world recognised publications, including a book on crisis-hit Argentina, Dr Shaikh has emerged as a stalwart in the ranks of the PPP top leadership amid the President's confidence that he enjoys in running fiscal affairs of the central government, the corrective measure on the part of Finance Ministry are most likely in the days ahead.
Though, the Finance Minister is managing the worst thankless job event assigned to him in his professional career spanning over 30 years in the field of economic policymaking, management and implementation, but what comforts most of us about his competence is his successful track record in the development of Sindh. His services as Minister for Finance, Planning and Development in Sindh during 2000-02 are still highly appreciated, particularly the success he achieved as Finance Minister of Sindh by clearing the province's SBP overdraft amounting to Rs 11 billion.
People's expectations from Dr Shaikh rests on their firm belief that he is now more independent than ever and not as vulnerable to political pressures as he was in the early months after his induction in cabinet as Minister for Finance, Revenue, Economic Affairs, Statistics and Planning and Development on 5th June 2010.