EDITORIAL: Federal Finance Minister Ishaq Dar, along with the Special Assistant to the Prime Minister on Finance, Special Secretary Finance and other senior officials, and Governor, State Bank of Pakistan (SBP) Jameel Ahmed have held virtual meetings on the state of the economy with the objective of maintaining growth and stability, according to media reports.
Such consultations are indeed necessary to ensure that the monetary and fiscal policies complement each other so that the fallout of the existing problems within the economy can be effectively addressed.
Two observations are in order. First, it is clearly a different State Bank of Pakistan than what it was when the incumbent finance minister was at the helm of the ministry of finance until 2017. After the passage of the State Bank Amendment Act 2021 in compliance with a “prior” condition for the success of the sixth review (dated February 2022) by the International Monetary Fund (IMF) that granted greater autonomy and transparency to SBP that was vigorously opposed by the PML-N (Pakistan Muslim League-Nawaz) stalwarts then in opposition.
In an article titled “The new SBP bill: when central bank autonomy goes so far that it challenges state sovereignty”, available on the internet, Ishaq Dar wrote on 15 November 2021 “not satisfied with having its “own man” as the Governor of the State Bank of Pakistan (SBP), the IMF is now pushing for amendments which would make SBP, our central bank, completely independent of the other organs of the state – and literally turning it into an outpost of the IMF in Pakistan! The aforesaid amendments in the SBP Act through the SBP Bill, if carried out, would surely be against the economic interests of Pakistan.
No country in the world has given such autonomy, nay independence, to its central bank. We might rue the day we agreed to all this, especially to the curtailment of the development (growth) function of the SBP – as it will no longer be a priority area of the central bank.” While no one can condone such a personal attack against the then Governor, yet his comments are relevant today as they indicate the finance minister’s strongly held views against SBP autonomy. It, however, cannot be denied that in Pakistan growth has never been accompanied by development because it has come about by indulging in higher consumption rather than investment.
Secondly, the present team of economic managers (Dar was appointed on 27 September this year while Jameel Ahmed became Governor on 19 August 2022) is no doubt engaged in extremely challenging negotiations with the IMF for the start of the ninth review – challenging because of the extremely fragile state of the economy today and the heavy reliance on IMF inflows, to the tune of 40 billion dollars in the current year, that would presage pledged inflows from multilaterals and bilaterals, particularly friendly countries.
Given that there have been only about 5 billion dollar inflows during the first five months of the year failure to meet IMF’s prior conditions as well as reversal of some measures taken by the previous economic team leaders would delay the ninth review at best and compromise the entire package at worst.
The country’s economy has nosedived in recent months, partly due to external factors (the Russia-Ukraine war, global recession and the devastating floods) but equally relevantly due to some questionable domestic policy decisions which range from extending unfunded subsidies in terms of cheaper electricity to exporters (at 19.99 rupees per unit) which the Fund regards as regressive in nature, a Rs 1.8 trillion agriculture package envisaging about over a trillion rupee credit to farmers which in turn would increase money supply and therefore inflation, and a widening differential between interbank and open market rupee-dollar parity that maybe understating the country’s indebtedness but it has led to a decline in remittance inflows by enabling the hundi-hawala system to get a meaningful boost after the global lockdown in the aftermath of Covid-19.
There is, therefore, a need for a revisit of some policies including the coordination exercise between the Ministry of Finance and SBP. While at face value coordinating fiscal and monetary policies may be beneficial yet with inflation attributed to administrative decisions (raising tariffs and indirect taxes) in nearly all recent Monetary Policy Statements and the government unwilling to implement key reforms in the power sector and tax structure the SBP needs to be vigilant in ensuring market-based exchange rate policy and a positive discount rate while the Ministry needs to revisit its tax policy, utility pricing policy and of course continued massive injections into loss-making state-owned entities.
Copyright Business Recorder, 2022
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