ISLAMABAD: There is an intent to bring down the current account deficit to four percent in 2021-22 from the potentially 5.5 percent by using monetary policy which will have serious social consequences leading to lower growth, higher inflation, increase in inequality and pushing six to eight million more people below the poverty line, said Dr Hafiz Pasha, former finance minister.
“Accountability of the State Bank of Pakistan must continue to the parliament – the supreme body in a democratic system, while the inflation rate target must rest with the National Economic Council (NEC) chaired by the prime minister, however, the central bank must have complete autonomy in operational issue but not on policy issues,” said Dr Pasha, while speaking at a session “Understanding the Social Footprint of Central Banking & Monetary Policy in Pakistan,” on the occasion of 24th Sustainable Development Conference organised by Sustainable Development Policy Institute.
Dr Pasha said that the focus, historically, in terms of social impact of policies has been very much in the domain of fiscal policy and it has been seen primarily as an instrument of redistribution in accessing the form of directly and also other types of expenditure, subsidies, and interventions.
He said that the present government in the budget presented in June 2021 highlighted the bottom up approach in which they tried to alleviate poverty. By using this approach, the government tried to subside the small and medium enterprise in Pakistan through the credit policy.
Government provided the credit packages to the people in order to reduce poverty and also introduced the Kamyab Pakistan programme for the young entrepreneurs. Pakistan after Covid-19 introduced new financing packages for the individuals and organisations for the development of economy.
Dr Pasha said that however, there has been a big change in the thought process at the federal government as well as the central bank-level and there is much more talk now of the role of monetary policy in reducing the current account deficit in the balance of payment, which is back to its traditional role of being the key agents, instrument and mechanism for stabilisation, which is seen as a tough territory once again.
He further said that an all-time high trade deficit of over $5 billion in one month was recorded in November 2021, which is scary as it was over 150 percent increase compared to the same period of last year.
Dr Pasha said that the current account deficit, if continues at this level, will reach 5.5 percent of the GDP, which is around $16-17 billion. The central bank has said now in an article written by the deputy governor SBP, saying that they will target for current account deficit of four percent of the GDP for the current financial year. The idea is to bring down the current account deficit from a potential 5.5 percent of the GDP to four percent of the GDP and to use monetary policy as one of the prime, perhaps, the key instruments for achieving this reduction through exchange rate policy and through enhancement in the central policy rate, he added.
He further said that the exchange rate depreciation has a minor positive impact on growth because it tends to reduce the trade deficit, but has a negative impact on investment and so on the net impact is marginally positive.
But because it leads to higher inflation particularly of imported food items, it leads to a significant increase in inequality and the end result is that the social impact of the exchange rate, eventually, depreciation increases poverty and increases inequality, the former finance minister added.
He further said that when the policy rate is increased, the growth rate eventually comes down. And the both result in increasing inequality, and lower growth leads to increase in poverty, which is much stronger than the case of devaluation, Dr Pasha added.
To bring down the current account deficit to four percent in 2021-22 from the projected 5.5 percent will lead to some social consequences, which perhaps in a sense are deemed by the government or central bank as inevitable.
“If we are trying to achieve this significant reduction in the current account deficit of 1.5 percent of the GDP, six to eight million more people will fall below the poverty line at a time when the Covid-19 has affected the employment levels and rise in poverty.”
He further said that it is going to bring down the GDP growth by 1.25 to 1.5 percent as compared to the government target of close to five percent and will be in the range below four percent.
Given this focus on managing the balance of payment and ensuring the external viability of Pakistan’s commitment to the borrowers, there is a need to ensure to the extent possible that this primary concern does not dominate so much that the human face of monetary policy for stabilisation of the economy is forgotten, he added.
Dr Pasha said that there are instruments still available including managing the flow of credit aligning the Kamyab Pakistan programme with the proceeds perhaps not at the same scale but at a modified scale focusing on ensuring there is no transfer of credit from the smaller provinces to the larger provinces, ensuring equity in the distribution of credit among sectors and so on.
There is a need to emphasize given the very clear link of monetary policy with the impact on poverty and employment and on social indicators.
He further said that there must continue accountability of the central bank of Pakistan to the parliament – the supreme body in a democratic system. As such the proposed law amendment to the SBP act of a very sweeping and mild ranging nature must allow and focus on ensuring a degree of accountability of the SBP to the parliament.
Dr Pasha said that the inflation rate target in developing countries such as Pakistan must rest with the NEC chaired by the prime minister and must ensure that there is coordination among other ministries.
“We are keenly seeing to the amended law to be submitted to the parliament, shortly, which has been under pressure from the IMF to push through as soon as possible.”
Dr Pasha said that an inflation monitor should be brought back, which kept track of inflation in different income groups as well as cities.
Hassan Daud Butt, Board of Investment and Trade, Khyber-Pakhtunkhwa, said a strong and long-term policy needs to be devised and implemented to prevent the frequent changes made in the monetary policies as they hurt the business community.
Dr Sajid Amin said the inflation target should be set by the parliament instead of the central bank.
The central bank should consistently engage with the think tanks, ministries, etc.
Accountability must be established within the central bank as well as where policy making is being done, he added.
More gender-inclusive committees for policy making must be established to acknowledge the other half of the population, said Dr Alia Hashmi, Member of the PM’s Economic Advisory Council.
Transparency should be established in policies made by the State Bank, so the citizens may know the impact they will have on them.
Dr Hamza Ali Malik, director Macroeconomic Policy and Finance, UNESCAP, Bangkok said that the State Bank needs to articulate a narrative and develop a formal definition of inflation in context to the purchasing power of the people of Pakistan.
The SBP needs to establish trust and credibility with the people of the country.
It is an institution of the state and is dependent on the state but it needs to be independent of the Ministry of Finance’s influence, said Dr Hamza Ali.
Monetary policy has become a kind of specific audience policy, which is not understood or read by most people of our country, said Dr Amin.
Amin, while presenting his paper, said that low and stable inflation for a sustained period (or simply price stability) is critical to ensure social well-being in a society.
In addition to improving long-term economic growth prospects, it helps address poverty and mitigating inequalities.
Pakistan continues to experience high and volatile inflation, which is hurting the lower income groups the most. This has obvious adverse implications for social well-being and cohesion. Thus, it must remain high on the agenda of the policymakers and the central bank in Pakistan, he added.
There is a need to put forward a clear definition of low and stable inflation/price stability.
For instance, five percent on average for at least three years, which is missing in Pakistan.
Currently, an annual inflation target is provided by the government every year, which keeps changing from year to year depending on actual inflation.
Further, the SBP should invest further in developing models that explicitly (re)define the social well-being tied with low and stable inflation.
Currently, in mainstream macro research (which influences the SBP’s research also) it is assumed to be maximization/expansion of material output/GDP.
This is then (incorrectly) assumed to be equivalent to social welfare.
Dr Jochel Hipplier, country director FES Pakistan said the social footprint of monetary policy or the social impact of monetary policy has been neglected not only in Pakistan but in Germany, Europe etc.
The social impact of monetary policy is not being talked about and under researched in many regards and it has been ignored, he added.
Copyright Business Recorder, 2021
Comments
Comments are closed.