The not-so-great quantum of autonomy enjoyed by the country's central bank, faces the grim prospects of a serious dilution if the version of the amendment in State Bank Act, passed by the Senate, becomes law. To restore the financial strength of the country it is of utmost importance that amendments in the SBP Act approved by the lower house become law. These amendments provide teeth to the central bank to assist the Parliament in the enforcement of Fiscal and Debt Limitation Act, 2005. Seeking Parliamentary approval for violation of the 10 percent cap on governmental yearly borrowing related to resource mobilization is one of the ways to protect the future generations against a back-breaking debt burden the present impudent generation is likely to bequeath to them. In a recent briefing before the Senate Committee on Finance, parliamentarians wanted to hear both the fiscal and monetary managers on inflation, interest rates, fiscal deficit and the balance of payment (BoP) position. Finance Secretary Dr Waqar Masood's views were based on policies and commitments framed and given to the government while the SBP Governor's and his team analysis's were a strong reflection of the ground situation. The Ministry of Finance appears to be happy that the CPI, in the month of December, came down from double digits to 9.5 percent. It therefore, brightens the prospects of another key discount rate cut anytime soon. The SBP, on the other hand, would like to wait and do its own independent analysis of December's numbers. At present, the SBP projects a 12 percent inflation for the current financial year. In reality, however, one needs to take a longer view. The three-year rolling target for inflation is fixed at 9.5 percent. As such it would be more appropriate to do a proper analysis for the next year's inflation before the SBP articulates its views, taking the timelag into account, on interest rates. A straight line relationship between inflation and real interest rate does not exist. In the ultimate analysis, at best it would turn out to be a judgement call of the monetary authority. The Ministry of Finance and the SBP also differ on the size of deficit for the current fiscal year. The Ministry of Finance projects it at 4.7 percent, while the SBP estimates it is above six percent. An upward tariff adjustments of electricity and gas; a possible upsurge in oil prices to $150 to $200 from existing $100 plus in case of a serious deterioration in US-Iran brinkmanship in the Strait of Hormuz and 2012 being an election year - could push the fiscal deficit figures well beyond 7 percent of the country's GDP. In relation to the last factor in particular, fiscal year 2007-2008 - an election year is a case in point because when it comes to sound economic imperatives in an election year, the government is a complete ignoramus. The combination of all these factors need to be taken into account. At present, there are no signs of any structural adjustments needed to reverse the low growth, coupled with the high inflation trend of the country's economy. As such, the fiscal deficit is likely to remain deeply entrenched resulting in a double-digit inflation. As a consequence, the SBP would be forced to allow a downward depreciation of the Pak rupee to keep exports competitive. The SBP is right in not giving too much credence to the Finance Ministry's rather unrealistically optimistic projections of forex inflows in the next six months. Privatisation proceeds from Etisalat have not been realised despite claims that 90 percent of properties of PTCL have been transferred to the privatised entity. The financial strength of cellular companies appears to have weakened due to cut throat competition. For example, there are no buyers for Instaphone cellular licence on sale. And, one can only pray that the $800 million inflow anticipated from the auction of 3-G licence sees the light of dawn in the timeline envisaged. Further, a strong likelihood of a weakening rupee. Exporters' propensity to hold back their export proceeds while importers' to book their future needs aggressively would constitute a formidable pressure on our forex reserves. An unsavoury relationship with the US and a growing friction among state institutions are all contributing towards a growing sense of uncertainty and despondency. It is indeed a sure recipe for economic weakening with investors sitting on the fence. It is indeed sad to see our political leadership on both sides of the aisle succumb to populist pressure without analysing the consequences of the economic choices. None of the parties opposed the re-employment of laid-off workers and regularising contract employees into the permanent cadre in the Public Sector Enterprises (PSEs) between 1999 and 2008. As a result, even the healthy PSEs turned into woefully sick units, requiring bailout packages on a regular basis to keep themselves afloat. An ignominious absence of a firm resolve to keep CNG stations shut during the peak demand season and instead shut down industries and power units are bound to have a severe impact on our exports. It is also bound to spill over into a rise of non-performing loans (NPLs) in the banking sector. Both the PPP and the PML(N) may gain more seats in the Senate for the next three years. But both will have a tougher time getting themselves re-elected in the same strength with the electorate facing high inflation, suffering energy shortages and witnessing a virtual demise of Pakistan Railways and PIA. It would have been more appropriate had the Senators also summoned the Planning Commission for a third view on the economic situation and asked them to come up with solutions to avoid the looming economic catastrophe. Unfortunately, however, our governance structure is suffering from a structural fault. The Planning Commission used to be headed by a minister answerable to the Chief Executive. The present norm of governance is to avoid long-term policies and instead take a short-term ad hoc approach to tackle the present chaotic conditions and opt for announcing and laying the foundations of projects to obtain photo-ops. Although, there's no doubt about the fact that country's finance minister Dr Hafeez Sheikh possesses the quality of understanding or dealing with economics and finance at a very serious level, his profundities seem to have been lost on the young audience comprising, among others, his Cabinet colleagues and political boss President Asif Ali Zardari. Copyright Business Recorder, 2012
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