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A careless caretaker government

There was no dearth of warnings about the impending economic crisis prior to the induction of the interim government. The PPP-led government had followed policies that led to a dire state of the economy, and even sanctioned some expenditure and took other economic measures towards the end of its tenure that added fuel to the fire.
It was expected that a non-political interim government would be more careful and responsive to the urgent policy needs of the economy, and at least reverse some of the outrageous last minute economic and personnel decisions of the previous government.

It was expected that the interim prime minister will promptly gather a competent economic team that would initiate a sound stabilisation programme to create conditions that could enable the next elected government to pave the way for structural policy reforms, to reduce inflation and impart stability to the balance of payments as a precondition to accelerate the rate of economic growth.

Unfortunately, the interim government has turned out to be totally incompetent, unable to grasp the gravity of the economic situation and indifferent to what is happening to the economy. It is likely to do nothing positive about the economy and its tenure, even if short, is bound to add to the underlying structural macroeconomic imbalances.
Instead of giving top priority to finding a qualified and experienced finance minister, who could quickly take charge of economic matters and guide the interim cabinet to take economic decisions that were essential to halt further bleeding of the economy, the position remains vacant.

Similarly, lack of seriousness of the interim government to tackle immediate economic problems came to the surface when the interim prime minister began to depend on the briefings of the bureaucrats of the ministry of finance and the governor of the SBP appointed on political considerations.

The officials of the ministry of finance and the governor of the SBP, who were a part of the problem, could not provide proper guidance to the interim government to find solutions for the difficult economic situation, and steer the economic ship towards safer shores.

The prime minister, who has no knowledge even of the first principles of economics and no guidance of a competent finance minister, has begun to rely on those very people to guide him in economic policy matters who have been a party to the creation of the economic mess in the first place.

The economy is in a bad shape partly because the bureaucrats of the ministry of finance failed to develop a prudent fiscal policy and the governor of the State Bank failed to control the growth in money supply within safe limits. The combination of a reckless fiscal policy and an accommodating monetary policy resulted in a high rate of inflation, depreciation of the exchange rate, depletion of foreign exchange reserves and a depression in the rate of investment and economic growth.
With limited time at its disposal, and no finance minister to guide the government, the interim setup has begun to take ad hoc economic decisions in reaction to the unfolding economic events rather than to control them. For example, the solution to the increase in loadshedding is being found in printing more currency notes to provide financial resources to the power generating rental companies to produce its costly electricity and supply it at exorbitant prices, pocketing hefty profits.

It is a subsidy being given not to the consumers of electricity but to its producers and is being financed by taxing the poor through money creation and inflation rather than taxation of the relatively rich people who have the ability to pay.

Moreover, no attempt is being made to curtail other unnecessary public sector expenditure and stop long-term privileges acquired by the previous government for itself. In fact, the interim government is engaged in managing the economy in a way no different than that of the previous government. The current expenditure continues to rise unabated and the loot continues in the name of development expenditure. The public sector enterprises continue to accumulate their losses inflating the quasi-fiscal deficit.

With no serious effort to collect more revenue, the government resort to borrow from the banking system continues unabated. The net domestic assets of the banking system increased by some 12 percent in the first nine months of the current fiscal year driven entirely by government borrowing from commercial banks. The government has borrowed a total amount of Rs856 billion during July 1 2012-March 29 2013 from commercial banks, or a borrowing of about Rs3 billion per day.

The continuation of the reckless fiscal approach carries with it the potential of a major financial collapse in one way or the other. In particular, the fiscal situation is getting out of hand with debt servicing liabilities fast reaching the level of the federal government share in total tax revenue.

In addition, public sector enterprises are borrowing from commercial banks with government guarantee and accumulating arrears that would need to be settled by the federal government either by taking over those liabilities or financing them through budgetary provisions.
With the budget completely out of control, it was only the SBP that could use its statutory authority to limit government borrowing from the banking system and thereby force it to have some fiscal discipline. It could also provide a saner economic analysis and a sound economic advice to the interim government to guide it towards the right path.
Unfortunately, the SBP is currently being led by those who are more interested in keeping their jobs than discharging their statutory and professional responsibilities as enshrined in the SBP Act.

The inflationary pressures in the economy are not only making the lives of ordinary people unbearable, the balance of payments has reached a critical stage both in the form of exhaustion of foreign exchange reserves and pressure on the exchange rate.

The administrative measures being adopted by the SBP to keep the exchange rate from depreciating further and stop-gap arrangements to shore up the depleting level of foreign exchange reserves of the SBP are only adding to the long run difficulties of managing the precarious balance of payments situation.

Nobody is focusing seriously on the imminent threat of external debt default partly because there are enough foreign exchange reserves with the SBP to carry on the business as usual for another few months. The interim government will be able to escape external debt default on its watch by exhausting the SBP foreign exchange reserves.
However, the next government will face an imminent threat of external debt default. It would have to approach the IMF for a rescue package on an urgent basis but such a package will be accompanied by tough policy conditionality. For the new elected government to undertake the needed reforms to obtain resources through an arrangement with the IMF, it would need to meet several prerequisites.
First, it has to be a politically strong government – able to take tough economic policy decisions and withstand the lobbying power of the powerful vested interest groups that have the capacity to encircle and intimidate a weak government.

Second, it would need to have in-house expertise to understand the real economic situation and determination to take politically tough economic policy decisions rather than engage in temporary patchwork or rely on distorted advice of the officials of the ministry of finance and the SBP.

Third, it would need to believe in, and practice, good governance and building up of sound economic institutions.

Fourth, the SBP would need to be freed from the burden of financing public sector operations and allowed to function autonomously under a competent management to raise the level of national savings and help finance private sector investment and economic activity.

In short, the grim economic challenges to be faced by the newly elected government would require a mature and strong political leadership that goes beyond gimmickry. Only time will tell whether or not the forthcoming elections will produce such a political leadership.
The writer is a former governor of the State Bank of Pakistan.

Dr. Muhammad Yaqub, "A careless caretaker government," The News. 2013-04-16.
Keywords: Economical issues , Economic policy , State Bank , Economic growth , Elections , Politics , Tax , Banks , Pakistan , PPP , SBP