Chairing a meeting of the Monetary and Fiscal Policy Co-ordination Board (MFPCB) on 18th March 2005 in Islamabad, Prime Minister Shaukat Aziz gave some sound advice to the State Bank Governor. He asked him to keep monetary expansion well within the target of 14.5 percent for the whole fiscal year. Further, the Prime Minister highlighted the importance of the MFPCB, emphasising that it should meet every quarter. As usual, the Board discussed vital economic aggregates, including monetary developments, credit to the private sector, inflation and foreign trade of the country.
Overall money supply grew by 10.4 percent until February 19, 2005, due mainly to the unprecedented increase of Rs 309 billion in the credit to the private sector as compared to Rs 230.5 billion in the same period last year. Shaukat Aziz was pleased to note that the private sector had gained confidence in the economic management of the country and is investing in a big way. Borrowings of the government from the banking system stood at only Rs 3.5 billion as against Rs 61.4 billion in the same period last year which reflected financial discipline on the part of the government.
With regard to inflationary trends, the government was making every effort to stabilise the prices of essential items in the country.
The Board was informed that government's fiscal performance during July-December, 2004 was impressive.
As against the target of Rs 121.1 billion during the first half of 2004-05, the actual deficit was only Rs 79.6 billion or 1.3 percent of full year GDP. Poverty and social uplift related expenditures amounted to Rs 122.6 billion against the target of Rs 119.2 billion for the first half of the current fiscal year. On the external front, during the first eight months (July-February 2005), exports were up by 12.3 percent, while imports had shot up by 35.6 percent on the back of accelerating levels of domestic economic activity.
Bulk of imports comprised machinery, equipment, raw materials and high priced oil. Reportedly, the Prime Minister was pleased to note the developments on the economic front and stated that the benefit of higher levels of economic activity will increasingly be felt by the common man.
MFPCB, according to the State Bank Act, is a very important forum to discuss and co-ordinate trade, exchange rate, fiscal and monetary policies of the country in order to ensure that they complement each other for the greater good of the nation. Although the State Bank was given complete autonomy in most of the matters relating to monetary policy and banking affairs, the clause relating to MFPCB was inserted into the Act so that the State Bank management could be advised to act and operate within certain parameters.
It is a matter of satisfaction that the said arrangement has generally worked well. For instance, Shaukat Aziz's advice to the State Bank to keep the monetary aggregates within the credit plan target of 14.5 percent was timely and hopefully will be respected by the State Bank.
This was, we believe, necessary keeping in view the inflationary impact of much higher expansion in money supply than the targets stipulated in the credit plans during the last three years. If such a trend was allowed to continue, it could have serious consequences for the economy of the country as well as for the poor and middle class sections of the society.
The Prime Minister's advice for holding a meeting every quarter would be useful in reviewing the unfolding situation at regular intervals and taking appropriate actions well in time.
However, there are certain aspects which need to be looked into more closely. For instance, the authorities are very pleased with the sharp growth of private sector credit but do not want the money supply to exceed the prescribed limit. It has been possible during the current year so far because of the neutralising impact of government and foreign sectors.
The State Bank must review the position more frequently with the change in the situation. Also, when the interest rates are low, a part of the bank credit is generally utilised for unproductive and speculative activities. The State Bank needs to keep a close watch on the evolving situation and do something about this. Also, a high growth rate of imports could be a sign of vibrant economy but its trend needs to be closely and constantly monitored in order to ensure that the demand does not outstrip our resources, plunging the country once again into a situation where it becomes hard to meet the payments obligations.