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State Bank of Pakistan announced monetary policy in the end of July for next three months. Monetary policy is not advocating the brightest of attributes of our monetary management because the central bank is more concerned to provide covers to government’s fiscal measures.

With CPI inflation of 11.7% [2.7% higher than target] SBP announced increase in policy rate to 13% from 12.5%. The business communities of the country and investment professionals are taking this move as an additional distress to national economy. In the age when real and financial investments have to be encouraged increasing interest rates can harm the cause. Even Pakistan is one of the few countries where interest rates are on higher side.

Actually we can not expect something else in the monetary policy because it is more a reflection of poor fiscal management. Even the growth in liquidity is evident but net domestic assets of banking system are increased by PKR 488 billion. This increase is mainly explained by government borrowings to bridge fiscal deficit and commodity operations.

Even the domestic debt of the country is increased by PKR 792 billion to stand at PKR 4.6 trillion in the financial year 2009 – 10. In the same tenure 2008 – 09 the domestic debt had increased by PKR 586 billion to stand at PKR 3.86 trillion.

This unhealthy growth in domestic debt of the government is accounted for fiscal mismanagement and feeding White Elephants [public sector companies]. Even the way government priced wheat @ PKR 950 / ton while they were advised to price it at PKR 900 is a point of criticism from various economic analysts. Since they priced wheat at 950 the prices have been gradually gone down in international market.

Analysts were expecting fiscal deficit to fall in the range 4% - 5% but now it is expected that the fiscal deficit shall fall in the range of 5.5% to 6.0%. Government looks absolutely failed in accomplishing the tax targets whereby FBR quoted shortfall in tax targets by PKR 53 billion to stand at PKR 1327 billion. As per monetary policy statement only PKR 177 billion was received from external sources against the budget estimate of PKR 377 billion.

Regardless of many poor attributes external current account deficit stands at PKR 3.5 billion that is far below than earlier projections. This is mainly because of increase in exports and a slight decrease in imports. As per the recent figures quoted by FBS [Federal Bureau of Statistics] exports of the country has increased by 9.3% in the year 2009 – 10 to stand at record $19.383 billion. This is indeed an achievement in the distressed time whereby the law and order situation is worst in the country and electricity crises have been hurting the economy for last two years.

The bottom line is simple that Government is absolutely failed to manage their fiscal policy. They are excessively hungry for loans to bridge their fiscal gaps. International financial institutions are also not that easy to access due to global financial turmoil so they are utilizing domestic borrowing sources and distressing country’s financial system.

Government is also willing to borrow from National Saving Schemes and if they shall raise the rates of these schemes so this can be another blow in benchmarking commercial interest rates. In it indeed encouraging that we are going up in our exports but if interest rates shall rise more so investments and expansion in industry and economy shall be widely discouraged.

The way floods are hitting the economic scene of the country so we can not expect handy outputs of our crops that can cause shortage of basic commodities and this shall cause us to invest in imports of commodities that matters. Even worldwide commodities are expected to rise in prices and this can add sever distress in government fiscal stream. I think government have no other option than coming up with a smart fiscal policy [cutting their expenditures and inefficiencies] because monetary policy can not work if it is being targeted to support fiscal survival by Central Bank i.e. influenced by Ministry of Finance.

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Mr. Omer

Mr. Omer [1982 born] started  his professional career as a commercial / investment banker after achieving Gold Medal in Finance at master level from University of Karachi in 2006.

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