By Dr Pervez Tahir
THE monetary policy announced by the State Bank governor for the first six months of the current year repeats its routinely ignored message to the government.
In its bare essentials, the message asks the government to stem the menacingly rising flow of borrowing from the bank. In 2007-08 this was as much as 80 per cent of the bloated fiscal deficit. The government must start reducing the stock of this borrowing which has accumulated to trillion-plus rupees. Needless to say, government borrowing from the State Bank provides unadulterated fuel to inflation.
There is nothing new in what the State Bank is saying and what the government is doing. What is new, however, is the tone and tenor of the State Bank. Not accidentally, what is also new is that there is a democratic alliance in place. Is it the swansong of a governor nearing the end of her tenure? Or, more ominously, has the State Bank joined the chorus of suggestions by some institutions of the state that the democratic government has failed to deliver?
Revenues have been overestimated and expenditures underestimated throughout the last eight years, but the State Bank had never pointed this out in a formal statement in the very first month of a budget. Every one knows what governments do on the last day of the fiscal year. But June 30 this year was exceptional. On this day the State Bank informed the public that the elected government had borrowed Rs55bn on a single day, with no comparable picture of such fateful days in the past. A comparison of sorts is given when it purports to show that the borrowing in January-March was Rs204bn, the period of the caretakers, while the democratic alliance borrowed a larger amount of Rs284bn in April-June.
Presented out of context, these facts show the democratic alliance as profligate even before it had time literally to spend a rupee. It could not have started any pet projects in such a short time. Nor could it dole out favours when it had hardly had time to establish itself. Its preoccupation was to pay for the subsidies of Rs407bn piled up as a result of the fiscal ineptitude of its predecessors. The unacknowledged fact is that the democratic government, at great cost to its popularity, has moved rapidly to plug this hole caused by the champions of macroeconomic fundamentalism.
The indictment goes on. Generally the revenues do not start pouring in during the very first month of the fiscal year. And despite very serious efforts to curtail them, the food and energy subsidies still have to be paid. But the State Bank is unhappy that the government borrowed Rs33bn in the first 25 days.
What has changed? Why has the State Bank suddenly become vocal about its autonomy. There was a VVIP visit at the State Bank on July 5, a day in the past to which this country continues to regress. The governor made a presentation on the economy. According to a press release, the governor stressed that the “revenue deficit should be converted into a surplus, as laid down in the Fiscal Responsibility and Debt Limitation Act 2005. The governor added that the key concerns of the SBP are high stress of the government borrowings and drain on foreign exchange reserves…. She also pointed out the importance of restoring investors’ confidence with a view to encourage investment inflows and consistency and continuation of prudent policies.”
The VVIP, continues the press release, “discussed various issues related to food and oil price developments and appreciated the SBP’s briefing. He also acknowledged the strengths of [the] SBP as an institution, its policy advice and its continued support in overall economic development of the country.” In attendance, among other VIPs, was the senior management of the State Bank of Pakistan. Not to be ignored, the VVIP is the appointing and reappointing authority for the governor.
Before this briefing, one vaguely knew that there existed a central board of directors of the State Bank, but it hardly ever found a mention in its policy pronouncements. But the monetary policy statement issued on July 29 repeatedly presents it as an assertive board. As a “pre-emptive” action, a commitment has been obtained from the government to ensure net zero borrowing in 2008-09. On June 10, i.e. before the budget, the State Bank informed the government that the central board of directors “resolved that [the] government should retire Rs21bn in each quarter of FY09.” The government has also been asked to include in the Fiscal Responsibility and Debt Limitation Act 2005 provisions to phase out the reliance on borrowing from the State Bank.
In May 2008, the State Bank described Pakistan as “the rare example” where this law does not restrict debt monetisation. This was never pointed out to those who introduced this law and claimed victory even before its promulgation that the begging bowl had been broken. Similarly, having accommodated thus far the process whereby “consumption and not investment has been the driver of growth”, the State Bank concludes for the democratic alliance that “excessive recourse to SBP borrowings to finance the fiscal deficit is now unsustainable.”
Section 9A(b) of the State Bank Act gives statutory powers to the central board to determine and enforce the limits of borrowing for supporting the federal budget. The central board has 10 directors, all nominees of the previous government and some even served in the cabinet of the chief executive of Pakistan in 2000-03. No wonder consistency of policies, meaning guided democracy, comes naturally to them.
According to the governor, a ‘jirga’ of this board is being sent to the government to assert the State Bank’s statutory right to determine the limits of government borrowing for budgetary support. Monetary policy makes its impact felt with a lag of 12-18 months. The signs of the impending crisis had appeared in July 2007 and the State Bank’s action then would have allowed the democratic alliance today a smooth transition. But the State Bank raised its policy rate by a mere 50 basis points and shied away from enforcing its writ on the free-spending Shaukat Aziz administration.
In November-December 2007 alone, the State Bank allowed the government to borrow Rs178bn. And now it is becoming restless because the government in its first month borrowed Rs33bn. The consequences of the failure to act in July 2007 are being projected as problems that the democratic alliance does not have the competence to deal with. The plot continues to thicken.
The writer was chief economist of the Planning Commission in 2000-06.
Source: daily Dawn, 6/8/2008