Daily Times ediotiral March 28, 2011

Economic management

Bowing to inevitable necessity, the government is mulling over a fresh IMF loan programme. The existing Standby Arrangement stands stalled in its tracks because the tax reforms proposed by the government itself to the IMF made shipwreck on the determined opposition of virtually all parties across the board, except of course for the PPP. In particular, the RGST could not be implemented, thereby exacerbating the fiscal difficulties of the economic managers. To tide over the few months remaining till the next budget, the government imposed, through presidential ordinances, flood and other surcharges on income tax, excise duty and some services. This was always going to be a one-time measure. Therefore the IMF would like to know, before finalising the fate of the stalled Standby Arrangement and any fresh loan agreement, how, through permanent reforms, the government intends to tackle its revenue shortages, the energy crisis, etc, on a sustainable basis that would allow the IMF loans/s to be repaid without hiccups. The government is even contemplating issuing sovereign bonds in the international market and offering these against the IMF liability/ties. It is not known, however, what the IMF’s response to this new proposal, which may make eminent sense to our economic managers as a way of relieving the pressures on our debt servicing, may be.
While the economic managers contemplate their IMF relationship, the State Bank of Pakistan (SBP) has kept the policy (discount) rate unchanged at 14 percent. The SBP, under its new governor, Shahid Kardar, insists this is necessary to control stubborn inflation. This nostrum might be acceptable if there was any evidence that the present strict monetary policy, of which the policy rate is the key, was succeeding in its avowed aim of curbing inflation. If the SBP is not lulled into complacency by our official (traditionally less than credible) statistics on inflation, and checked these against other, independent findings and the empirical experience of the markets and consumers, it may come to understand that its own stubbornness in maintaining high interest rates through the policy base rate is flying in the face of the facts on the ground and arguably exacerbating the dearth of investment, local and international. High borrowing rates do not bother the government as borrower, although we have it on the SBP governor’s authority that it has of late curbed its profligate borrow-and-spend ways. But they do discourage private sector borrowing and therefore investment in these times of the high cost of living, let alone doing business. Recession-hit economies everywhere in the world, particularly the developed world, while monitoring inflation carefully, are cutting interest rates to encourage investment and economic recovery. For Pakistan, with the dubious distinction of being one of the last destinations of choice for investment, given our terrorism and law and order crises, should take a leaf out of their book and, in recognition of the fact that high interest rates are discouraging investment while failing to curb ‘stubborn’ inflation, revisit the current monetary policy.