Any economy, which is heavily dependent on borrowing, foreign assistance and sell-offs, cannot afford the luxury bailouts or subsidies. It is important to understand that such concessions are not possible without printing excessive money.
Interest rates need to be tightened further and excess liquidity should be drained out of the banking system in such situation, says Asad Rizvi of CMKA. The global financial market is in a mess. Management experts and economists believe that growth is the key to reduce poverty no matter at what cost. On the contrary, corporate bosses have a task to increase their profits annually?
A growth of profits at the rate of 25 percent annually means that in 4 years the rise will be one fold. But the growth ratio of businesses in the recent four years was at much faster pace and that too by many folds, helped by exaggerated demand of the essentials such as oil, food, and housing, inflating the size of economy.
The unfortunate part is that the wealth distribution has been improper. The poor who were supposed to benefit from higher growth did not get their due share. The portion of meal that was fetched for a dollar four years ago has been halved for the same amount of money. The economies of developing countries that import oil and are short in food are at the bring of collapse.
This has certainly impacted Pakistan's economy, which is facing dual challenges, politically as well as economically. With small export growth projection for the FY 08-09, the economy is likely to carry a huge current account deficit, trade deficit is unlikely to come down, and balance of payments is in negative. The deferred oil payment will further aggravate the external debt figure.
With sharp rise in domestic oil price and its spillover effects yet to be felt and rising essential commodities, inflation is mounting at a very fast pace and eroding purchasing power of rupee.
In our view, SBP is the only institution that has played a vital role to contain inflation, though we are in disagreement with its monetary policy stance for not taking pre-emptive measures on the tightening issue.
It is now time to decide and choose between inflation and growth, as we are heading towards stagflation, which will obviously hamper growth. CMKA prefers sharp monetary tightening at the cost of growth. With widening current deficit and negative balance of payment, ineffective fiscal measures and depleting foreign exchange reserves, the SBP is not in a commanding position to aggressively support the rupee, unless deficit is lowered to a comfortable level. The Central Bank is not left with enough options to arrest inflation.
Therefore, discount rate, Cash Reserve Requirement (CRR) and Statutory Liquidity Ratio (SLR) are the only tools available with it. Even a surprise cash dollar injection of USD 5 billion could be good step for a mere 6 months period.
The frog is in the pot of water. As long as the water is not boiled, the frog is safe. So don't allow the water to boil. Whether, a discount rate hike of half-a-percent or 2 percent, we support a net impact of minimum 3 percent, discount+CRR+SLR = 3 percent. Or better prepare for printing a Rs 10,000 bill.