Alarm Bells!
The Annual Report of the State Bank of Pakistan (SBP) for the year 1994-95 seems to have created a stir in financial circles, certainly much more than one can recall in the recent past. However the full impact of the financial implications on the economy as enunciated in the Report has not yet become general public consumption, the common man remains unaware of the catastrophe likely to befall him. The Government reaction has been subdued enough to be called as non-reaction. Maybe they are all “Infantry-men” in the Finance Ministry and know that when under fire to keep their heads down. While the detailed reaction from professional economists and other experts of the country is still awaited, the layman should expect the worst, our financial sins have finally caught up with us. Some aspects of the Report beyond the cold statistical data and figures must be brought out for the benefit of the general public.
The SBP Report has not said anything vastly different from what the SBP Governor and his senior colleagues have been saying publicly for some time, that the tight fiscal control practiced in the first year of the Ms Bhutto regime has virtually ceased. Anyone following the SBP Governor’s speeches and that of his Chief Economic Advisor would confirm as to what was to be expected in the Report, the finest in the years since its inception (and probably the last really independent one). However, given the greater drama going on in political circles, the many warnings about problems confronting the economy have been largely ignored, both by the rulers and the masses. Even the Opposition has not been able to focus the mind of the masses on these issues. Earlier statements or speeches of the Governor SBP covered only one or two aspects of economic management and prognosis thereof in the country. The SBP Annual Report has now given an integrated picture of the entire economy with the result that the impact sounds totally different from the one emerging from piecemeal analysis. The report is not critical, in fact it is analytical. What emerges is that there are a number of serious lacunae in the economic management and that the agency or agencies responsible for such lacuna have been identified. Thus it is not fair to criticize the State Bank as having just woken up from Rip Van Winkle’s sleep on the economy. If the Report is perceived to be flawed in terms of analysis one would like to see an attempt at alternative analysis. There may be different views as regards economic objectives, their priorities, strategy to achieve those objectives and a host of other things. For one there are political constraints with which the SBP can be familiar but for which its approach may be theoretical and may not have the same practical compulsions of survivability as any ruling political party, therefore an alternative version on analysis can be given which can come out with different conclusions. Economic developments in Pakistan in the years ahead crucially depend on what we can make of the macroeconomic analysis given in this SBP Report. An independent Central Bank, coming out with sound advice, should be taken as an asset rather than being viewed as an obstacle to government policies. Unfortunately bureaucracy labels anyone disagreeing with its policies as an “enemy” and translates that to the incumbent rulers as a potential threat to the political government. Government being a supreme authority not only in terms of taking decisions but in accepting the final responsibility and results thereof can always reject any advice if not found feasible or pragmatic in terms of sound governance since the recommendations of the State Bank are not mandatory. An independent microanalysis throws up options, if we have a few more reports written independently and analytically on the economic problems more frequently than once a year, things can definitely improve in terms of economic options available to the Government. The incumbent Governor SBP Dr Muhammad Yaqub enjoys great reputation in the financial circles of the world as a man with an incisive mind, intellectual integrity and sound analytical approach to problems. To quote Euromoney, “The sole economist in the core group of four which has been dealing with the IMF is Mohammad Yaqub, the Governor of State Bank of Pakistan, the Central Bank. He spent most of his career with the Fund (IMF) but, in 1993, took early retirement from it after failing to gain promotion beyond the rank of Assistant Director. He knows the Fund’s line of argument very well. So he can be very tough in countering it, says an insider. But his frustrated ambitions there have given him something of a chip on his shoulder and that doesn’t help. Bhutto should have a panel of economic experts capable of giving her solid advice, says the same source. But only Yaqub falls into that category. Basically she’s dealing with a bunch of bureaucrats with whom you can’t have a proper discussion. If she had a better team, most of the problems could have been overcome and Pakistan would still be on the IMF programme. We realized the extent of our problems later on. The potential for a harsh public reaction to a tough budget also became obvious quite suddenly. However others maintain the IMF would have been more amenable had the government kept its lines of communication open. The Fund is in the business of lending money, says one of its former officials. It was keen to keep Pakistan on board,” unquote.
In an interview to Ahmad Rashid of THE NATION given just before the release of the Annual Report, Dr Yaqub let it be known that the Government had exceeded by Rs 7 billion in the first two months of the fiscal year its self-imposed Budgetary mandate not to borrow from the banks more than the Rs 30 billion it had promised for the full year. While every government does tend to borrow heavily in the first few months of the financial year to cover the time-lag against revenue receipts, given the excess amount it has already borrowed, the Government seems unlikely to meet any of the financial targets it had set itself, viz (1) GNP growth rate of 6.5% (2) budget deficit not more than 5% (3) rate of inflation not to exceed 9.5% and (4) limiting domestic liquidity at 13%. The government had already run afoul of the IMF in the last fiscal year 1994-95, having not stayed with any of the targets set in their budget. The targets for fiscal year 1995-96 were already not in conformity with IMF parameters the second year running and the problem seems to have been compounded by failure in attempts to achieve these. This will not endear them to the IMF as reflected in the rather cool reception given to the presentation of VA Jafarey and party in Washington this month.
The most worrying aspect in the economic analysis is what the Budgetary shortfall will do to the rate of inflation, estimated by experts to be much more than that showed by the Government (the SBP maintains it to be 13%, some experts consider it closer to 22%). As the budget deficit increases and GoP is forced to further resort to bank borrowing and therefore increasing monetary supply, inflation will continue to virtually fuel itself. As much as the Ms Bhutto Regime practiced austerity in fiscal 1993-94, the lack of control early in fiscal 1995-96 is extremely alarming. It is therefore quite reasonable to assume that GoP will not meet its own budgetary targets two years running. The stage is then set for inflation to run out of control as government resources come under pressure and monetary control goes out of hand. The only alternative to resort to fiscal austerity, is most unlikely in the current politically charged atmosphere but that bitter medicine must be swallowed.
The devaluation of the Indian Rupee has further put us into economic doldrums as our textile sector has come under renewed pressure because of Indian exports, already very competitive in the international market, which have become too much for our products to compete with. On the other hand devaluation creates its own set of problems as far as inflation and debt servicing are concerned. The only recourse is to augment the revenue-gathering machine to bring more people into the tax net as increasing direct and/or indirect taxation will have its own dampeners on the economy as well as inviting public reaction. Trial balloons, like terminating of servicemen’s pension commutation, have already been shot down because of rather severe adverse comment. It seems the only way left for GoP is to inflate utility charges like electricity, gas bills, etc. Unfortunately this can only be done to a point lest it lead to possible consumer’s revolt. The general public, particularly the salaried class, is already close to breaking point as to its ability to keep on bearing additional financial burdens.
Ms Bhutto must heed the advice of the SBP as given in its Annual Report. A sensitive politician, she has already reacted by asking SBP to work out fiscal austerity measures in consultation with the Government. Furthermore, she must not reinforce failure, it is time to put some of her economic team out to pasture. It is prudent not to wait till we are forced to use wheelbarrows to cart enough money to the market to pay for a loaf of bread.
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