Warning against populist measures
 

The Pakistan Institute of Development Economics (PIDE) is a renowned economic institution of the country and offers very sane policy advice most of the time.

In its latest report, the PIDE has observed that "with the government embroiled in political controversies and the election year approaching, economic issues are likely to remain on the backburner for at least in the near future, dimming hopes of a reversal in the economic situation." The temptation of the government to adopt populist measures ahead of elections could further compound economic difficulties of the country.

So far as the behaviour of economic indicators was concerned, the economy was likely to miss the overall growth target of 4.2 percent due to intensification of the energy crisis in recent months and continued weakness in the manufacturing sector.

The target for fiscal deficit at 4.7 percent of GDP was also unlikely to be achieved with slow growth in revenue collections, continuing losses of the state-owned enterprises and increased pressure on public spending.

Much of the increase in tax collections by the FBR was accounted for by sales tax on rising imports of petroleum and fertilisers and this increase was unlikely to be matched by tax collections from domestic sources in view of the sluggish economic activity in the commodity producing sectors.

With fiscal decentralisation, the state of provincial public finances could have important repercussions for overall fiscal stability.

So far, provincial budgets were reportedly in deficit and if this trend continues, provinces would be unable to generate required surpluses, thus putting further pressure on government finances.

Furthermore, the government may be inclined to ramp up public spending in the coming months to gain popular support, thus imperilling already strained fiscal balances.

The PIDE has also warned the government about the risk in its borrowing strategy to finance the budget deficit.

It says that the government has curtailed its borrowings from the central bank but it was disturbing to see that this was achieved on the back of escalating government borrowings from the commercial banks.

Worse still, public borrowings from the commercial banks were helped by massive liquidity injections by the central bank.

Such a policy was clearly counterproductive as it crowds out private investment on the one hand and erodes the effectiveness of monetary policy to control inflation on the other.

On the external sector, a combination of factors including weakening exports, shrinking foreign capital inflows including loans and aid, rising petroleum prices and approaching loan repayments has heightened Pakistan's vulnerability to balance of payments difficulties.

We feel that the latest observations of the PIDE about the state of the economy are truly poised and timely.

Most of the analysts agree that projections made earlier about the growth rate of the economy, size of the fiscal deficit and the outcome in the external sector during FY12 are no more valid due to certain negative developments during the course of the year.

There are now almost clear indications that the growth rate target of 4.2 percent is not likely to be achieved and the fiscal deficit target of 4.7 percent of GDP is certainly going to be missed.

The current account balance of the country, which was in surplus last year has already registered a deficit of over $2.6 billion by January, 2012 and there is no hope of a reversal in this trend in the remaining months of the year.

The C/A deficit, it may be mentioned, would have been much larger if home remittances had not jumped to a record level.

However, the sustainability of this source of financing is definitely a matter of contention, which tends to increase the vulnerability of the country to external shocks.

The PIDE, in our view, has also done a service by highlighting the shift in the mode of budgetary borrowings and its impact on the effectiveness of monetary policy.

Up to now, most of the comments on this policy change had revolved around curtailment of credit to the private sector and the increase in lending rates.

Hopefully, policy-makers and other analysts would now be in a better position to understand and appreciate the existence or accentuation of price pressures in the economy at a time when monetary policy of the country as denoted by the level of discount/bank rate was kept reasonably tight.

What blunted the efficacy of such a policy was obviously consistent injection of liquidity by the State Bank through the commercial banks to satisfy the unending appetite of the government for finances to bridge its budget deficit.

Contrary to the established practice, it also suited the commercial banks to assume an intermediary role between the central bank and the government because it provided them the opportunity to earn higher profits without raising their own resources and taking undue risks.

Clearly, the PIDE report has been released at the right time and is specifically meant to warn the government that the economy of the country is in a poor shape and cannot sustain the burden of populist measures which seems to be a preferred strategy at the moment to influence the outcome in the coming elections.

Such a mindset is of course sad and would destabilise the economy further, with the result that the incoming government would have to make greater efforts and adopt harsher measures to rehabilitate the economy and put it on a sustainable path of development.

Obviously, it would have been much better to leave the house in good order and set a worthy precedent to be followed by others but in the present circumstances, this seems to be no more than wishful thinking.

Anyhow, the PIDE has done its professional duty and we could only hope that its observations and advice are somehow able to strike the right chords in the right quarters.

[url=http://www.brecorder.com/editorials/0/1165139:warning-against-populist-measures/?date=2012-03-14]Warning against populist measures | Business Recorder[/url]