June 13 - 19, 20

The finance minister has described protection of economic recovery and reversion to single-digit inflation as the top most budgetary objectives. The underlying causes of the stubborn and forward-moving inflation have been referred to in passing. While a resolve to control government spending has been shown, no hints have been given as to how economic recovery will be protected, or inflation controlled, without softening of monetary policy stance. The SBP has been given more than enough time to learn that high interest rate policy is totally out of place in the current global economic scenario. It has not only choked foreign investment inflow but has also driven domestic private investment away possibly to some other economies with better incentives and more ease of doing business.

On fiscal side, it is not the size of deficit that should worry our economic mangers rather the way of government spending needs to be altered. The FM has made it [almost] mandatory for the provinces to prepare surplus budgets to keep the federal budget deficit size at four percent of GDP. This will expose the provincial economies to three-pronged pressures - regressive monetary policy pressure, inapt fiscal policy pressure and pressure to curtail provincial government spending. In this scenario, any hope of achieving the top most budgetary objectives can hardly be cherished.

Alan Greenspan wrote in his book The Age of Turbulence: "I have always harbored a nostalgia for the gold standard's inherent price stability - a stable currency was its primary goal. But, I have long since acquiesced in the fact that the gold standard does not readily accommodate the widely accepted current view of the appropriate functions of government - in particular the need for government to provide a social safety net." While we have resigned to the fact that inflation is inevitable in fiat money system and that the golden age of gold standard cannot be expected to stage a comeback, we cannot treat the inflation phenomenon with half-hearted and lackadaisical approach. Living with inflation is like sleeping in a snake pit. We have to remain ever vigilant to keep inflation to the minimum possible. Failure to do so may push us to the hyperinflation zone - and we are not much far away from that dreaded zone. The developed economies have learned the ins and outs of their favorite market-based economic model.

They have set a trade-off between inflation and social safety net. They allow inflation to rise to a manageable level and to maintain the strength of their social safety net. We have no such mechanism, as our social safety net is virtually nonexistent. Programs like BISP too reek of corruption and political bias. In the absence of social safety considerations, a galloping inflation can only be blamed on economic and political malfunctioning.

Inflation has an undiscovered yet a certain co-relationship with the benchmark policy rate. In the event of an adverse supply shock, which raises prices and reduces output, inflation targeting may force the central bank to check money supply at a time when the economy is in recession. This is exactly what happened in our case. SBP had to intervene with successive rate hikes at a time when the economy had already taken a downturn due partly to global economic factors and partly to our home-brewed political and financial crises, which saw massive capital outflow. Under the then prevailing circumstances, the SBP thinking was quite clear that even if the interest rate increase adversely affected growth in the short term, the primary concern would remain the check on inflation. Its persistence with an unusually high policy rate, however, remains enigmatic. Perhaps it's a way to shield its weak autonomous position. The source of inflation in our case is not high consumer spending; rather it is high government borrowing both from SBP and the banking system. Since SBP is not in a position to exercise its authority over government functionaries to curtail their lavish spending, it creates a smoke screen of high policy rate to give an impression that it really means business, the business of achieving price stability.

The ongoing global and regional interest rates are in the single digit and in some cases close to the zero level. Fortunately, the world interest rate reporting agencies do not include Pakistan in their tables of comparison. And, that saves us the humiliation of being an economy from another planet. Let's make an attempt to compare our interest and inflation rates with those prevailing in some of the world and regional economies.


Pakistan 14 14.2 Taiwan 1.63 1.25
India 6.5 8.2 Malaysia 2.75 2.4
China 6.06 4.9 Vietnam 11 12.3
Sri Lanka 8.5 6.8 Australia 4.75 2.7
Hong Kong 0.5 3.8 United States 0.25 1.6
South Korea 2.25 3 UK 0.5 3.7
Japan 0.1 0.00 Canada 1 2.3

Vietnam, the only regional economy with interest and inflation rates in double digits, has still to go quite some distance to challenge our leading position, as far as the said two economic indicators are concerned. Apart from these two unenviable resemblances, Vietnam economy, after shifting its focus from a highly-centralized economy to a socialist-free-market economy, has nothing much in common when compared to Pakistan's economy. It is a fast growing Asian economy tipped to become the fastest growing economy by 2025 with a potential to grow by 10 percent annually. Coming back to the subject, it will be observed that there is an unmistakable relationship between the interest and inflation rates in an economy. In 79 percent of the cases mentioned in the table, the difference between the two rates is less than two percentage points; and in 43 percent of the cases the rate of inflation is less than the rate of interest. Keeping with the regional trend, a hypothetical policy rate of around eight percent could have restricted our inflation to single digit. There is no other way to ward off the impending hyperinflation threat than to go back to our golden economic era of 2003-07 when all sectors of our economy performed well under low-interest and ample private sector credit policies. The sooner we do it the better.