According to recent media reports, opinions in the Planning Commission (PC) and the State Bank of Pakistan (SBP) are poles apart over how to sort out the current fiscal and monetary mess – legacy of the ‘democratic’ regime that is proudly completing its term.
The Deputy Chairman PC surprised everyone when, reportedly, he said that SBP cannot hide behind the fact that the crisis a combination of fiscal and monetary policies; while the government can take care of its fiscal side, SBP can’t absolve itself of a role in its monetary side.
Surely, he knows how much of the responsibility for the current economic crisis – rooted primarily in the fiscal deficit accumulated by the regime under which he serves – can be loaded on the SBP that kept warning about the consequences of the rising fiscal deficit.
The part for which SBP can be blamed is its failure to effectively pressurise the government to contain the fiscal deficit. But, given the government’s stand that parliament is ‘supreme’ and can do anything (eg violate the Fiscal Responsibility Act-2005), what could the SBP do?
Recently, the Federal Secretary Finance didn’t agree with SBP-compiled figure of public debt (that is now over 62 percent of the GDP, and exceeding the limit imposed by the Fiscal Responsibility Act), nor admit that public borrowing wasn’t being retired on a quarterly basis.
It is too late for anyone, be it the Deputy Chairman PC or the Secretary Finance, to point fingers at others for the economic crisis mess we confront; it was a process that went on unabated for five long years during which bureaucrats were forced to surrender to political whims.
This governance profile induces the ‘softer’ bureaucrats to accept political solutions to administrative issues, and the principled bureaucrats – a class now almost extinct – to resign, but since we didn’t see many resignations, the slide in administration of the state continues. Apparently, this government attitude also forced the SBP to focus on economic stability on a day-to-day basis rather than on the medium and long-term effects of its actions on the economy, the perception about its risk profile, and its impact on sentiment for investment.
An example thereof is selling scarce exchange reserves to slow the rupee’s slide. It reflects oddly on the SBP because liquidating the exchange reserves to stabilise the rupee can be a short-term solution; given the ongoing slide in these reserves, it can’t be a lasting solution. That solution is structural changes in the economy that progressively lower the trade deficits, and encourage DFI inflows to permit building exchange reserves from own resources, not via medium-term credit from IMF under its Stand-By Arrangement (SBA).
In late February, during a presentation before the Senate’s Standing Committee on Finance, the SBP Governor had cited constrained foreign financial inflows, scheduled debt repayments, and rising burden of oil import as the factors causing external sector weakness.
According to him, during 2008-12, average annual oil imports rose to $11.7 billion from its average of $4.9 billion during 2003-07, and in FY13, would touch $14.8 billion because oil price could average around $110 per barrel – up from $41 per barrel in 2005.
Besides, due to upward adjustments in energy prices, support price of wheat, and further depreciation of the Rupee’s exchange rate, inflation may again reach double digits in the last quarter FY13, as predicted by the IMF in its last report on Pakistan.
But, according to the Governor SBP, forex reserves could still be around $7.5-8.5 billion in June 2013, and FDI inflows from Saudi Arabia (details undisclosed yet) and export proceeds of sugar and wheat would together forestall a balance of payments crisis.
Also, that the currency swaps being negotiated with China and Turkey would be fully operational. This scenario assumes that shortfalls of wheat and sugar won’t occur, DFI inflows will materialise despite domestic chaos, and benefits of currency swaps too will materialise.
Relying on these optimistic assumptions the Governor SBP had disagreed with the former Finance Minister Dr Hafeez Shaikh and Deputy Chairman PC on the need for entering into a fresh SBA with the IMF – an approach that amounts to taking a big risk, ie, a collapse of the whole system.
At the moment SBP is the only stakeholder that believes that there is no chance of a default on repayment of IMF’s instalments due until 2014. While SBP admits that the forex reserve position is challenging, but says “it is manageable”; let us hope that it is. But the prevailing conditions (crime, energy and power shortages, and resultant social chaos) that compel Pakistani exporters to refuse even the few orders they get, the SBP view sounds overoptimistic because it relies heavily on non-trade foreign inflows, which won’t crystallise.
Secretary Finance’s stand that even if the position seems “manageable”, but what matters is how foreign markets perceive this scenario, makes sense. Attracting non-trade inflows – DFI and term credit via floating bonds – depends on perception of Pakistan-risk abroad.
While it was unlikely that the IMF would be willing to execute an SBA with a regime that was ending its term, discussing the terms of an SBA so that it could be signed with minimum subsequent discussions and delay, once a new regime took over, was a sensible idea.
The Deputy Chairman PC pointed to investment being at its lowest ebb and remarked that monetary easing had failed to boost investment. But the fact is that energy and power shortfalls and increased lawlessness due to large-scale employee layoffs killed the incentive for investment.
The fact is that the shooting up of government’s domestic debt to 92 percent of total credit extension during FY12 compared to just 56.9 percent in FY08 obstructed the implementation of SBP’s monetary policy with the desired effect – a pick-up in economic activity.
But he was right in asking the SBP to give a clear signal about how long can the SBP continue to defend the rupee with low reserves and adverse external environment, especially when SBP has already spent $1.4 billion on defending the Rupee’s exchange rate.
That said, he was wrong in telling the SBP that “We need to pre-empt the situation and take necessary steps now to stabilise the economy and the political environment rather than letting a crisis to occur.” SBP can’t wield any influence in stabilising the political environment.
Gross fiscal mismanagement, that caused fiscal deficit (financed domestically) to average about 6 percent of GDP since 2009, created multiple economic distortions that steadily squeezed the private sector, and with it, economic growth. A debate devoid of introspection is a futile exercise; it can’t help devise a remedial strategy.
A. B. Shahid, "A futile debate," Business recorder. 2013-03-05.Keywords: Economic system , Economic issues , Economic growth , Economic policy , Monetary policy , Fiscal policy , Pakistan , IMF , SBP