Jan 26 - Feb 01, 2009

Sherry Rehman Information Minister told media after the federal cabinet meeting last week that it was decided in the meeting not to increase interest rate further as inflation tended to move downward slightly. It was not clarified if rate would be brought down from present level. One thing is for sure that the central bank does not enjoy complete autonomy even of decisions that directly affect its monetary management.

Monetary tightening is adopted as an ideal tool to restrict money supply in the system, failure to which is considered source of inflation and it also provides central bank a means to restore capital adequacy distorted by higher debt to GDP ratio. Interestingly, it is the government foremost that is discouraged from bank borrowing through upward revision in discount rate and it is it that can influence policy rate measure. SBP's policy announcement this week will obviously take influence from postponement of interest rate rise proposal in the cabinet meeting.

Since high public debts mean changes in fiscal management of the central bank at the end, giving complete and unshared discretion to it for deciding about when and where policy rate shall be revised will be sensible and pragmatic step. It was said by the minister earlier in a news report that government would minimize government borrowing and it started to repay loans borrowed from commercial banks and SBP.

Last time just a month or two before the approval of IMF stand by arrangement loan facility, State bank of Pakistan had raised discount rate by 200 basis points to 15% to hold back untamed inflation. The attempt was a good gesture to give a gentle push to the Fund and argued as a preemptive stance to meet loan criteria that stipulate cutback in government borrowing among other things. Although the gesture proved its worth when US-led Fund released first tranche of $7.4 to Pakistan it failed awfully to cut size of public debts, basic reason in which rate trek finds ground. In other words, inflation kept adamantly on the pace despite recurring policy rate rises many times in a brief timeline. Government debts might be innocuous if fiscal space had been created by slashing budgetary deficit that still is 7% of GDP against 4.7% set target in the budget 2008-09. Even though slight deceleration is noticed in the rate of inflation this month there is unlikelihood that rate will come down to 12% envisaged in the annual budget, from current over 24% at the end of this fiscal year.

Under the IMF program, government put in to actions certain options to meet revenue-expenditure shortfall. It is assumed that these would help broaden fiscal space. Rationalization, or put in a straight way, reduction of subsidies has unraveled current of price upsurge in consumer products however. Likewise, it has spurred reverse trend in industrial output growth rate by 5% in first half of this financial year. Removal of subsidies on energy products elevated the cost of electricity and gas consumption and jacked up transportation charges. The government earns handsome revenue on petroleum products through PDL, which is tantamount to sucking blood of people. Government has already expressed its willingness to show modesty in public spending. Tenably, it can do that by mowing down non-development expenditures. Government revenue enrichment is an option that can diminish fiscal deficit. Expansion in revenue sources and proper revenue collection will set aside need of the government to monetize debts to meet budgetary needs.

Government may likely to achieve the revenue target of this fiscal year, but rationalization in imposition is also needed. Imposition of presumptive and indirect taxes will ramp up revenue but crush poor people under its feet through callous sales tax and petroleum development levies, etc. There is a need to bring tax evaders under the net as pleaded by several economic analysts with pang of people's misery. Government officials are sure that annual target for revenue collection of Rs. 1250 billion will be attained and said current collection has reached to 10% of GDP. The claim may taste truth in yearend as indicated by figures in the midway of ongoing financial year. FBR collected net revenue of approximately Rs. 553 billion during 1HFY09, registering growth of 27% over corresponding period last fiscal. Upbeat sales tax recorded Rs. 217 billion against Rs. 210 billion direct tax during the period. So government will be in the money; but if it is more at the cost of poor public than income tax and other levies on privileged sectors then the fate of poor and low-income group will no more change and continues to be battered with unruly and unbearable cost of living directly affected by indirect taxation on sale of products and industrial raw materials. In the context of reduction in subsides and pubic development funds the impact shall turn up twofold.

What SBP will say about outcomes of earlier policy during announcement of upcoming monetary policy is to be seen. However, it is quite evident that high interest rate did little to tame inflation and not induced restraint in government bank borrowing. If it did that to an extent in common opinion of analysts "inflation is on the downturn and economy is too". Most detrimental effect of high interest rate is slowdown in economic growth. In economy like of Pakistan where weakest GDP growth rate of 3.5% to 4% was projected by the central bank, this portrays not so good sign. It is argued that many developed countries are holding stable economic outlooks despite the fact that their growth rates are below two or three percent. Yet, that they are developed seems to be overlooked. Wave of global economic setbacks saw many economies being contracted and their growth rates retracted. Pakistan is an exception for its economic slackness has been aggravated by global fallouts. And, it has to cajole GDP growth rate that is reminiscent of past eight years. As it sounds like a dream, at least no letup should be allowed to gain economic stability. Perhaps, it is better weak economy be rescued through freedom in accumulating capital by industries for increasing productivity. This will happen only when financing is attached with adequate interest rate. Central banks in kindred economies have sliced interest rates to enable economies to weather parching whirlwinds of world economic turmoil. Pakistan's aloofness has yet to produce results.