June 26, 2006	Monday	Jumadi-ul-Awwal 29, 1427

THE world’s leading economists and international financial agencies are agreed on restraining high economic growth rather than let high inflation upset the socio-economic order and eventually retard the high growth itself.

There is consensus among them that while high growth generates inflation appropriate measures should be taken to restrain inflation rather than allow it to slow down the growth chaotically at the end.

Now, with the world oil prices running at nearly $70 a barrel and likely to stay for quite some time at the about the same and interest rates around the world rising, it is imperative to adopt measures to restrain the rising inflation.

The Opec too, in its annual review, says that major countries of the world have found it safer to slow down high growth instead of letting inflation run amuck and they include China, a major energy guzzler. Many countries have reduced oil consumption. And the Opec has reduced its production of oil to that extent.

In this context, the World Bank and the International Monetary Fund have stressed the urgency for the regulators- the State Bank of Pakistan- to further tighten the monetary system and hold down inflation in the three to six per cent range.

In the light of how the monetary policy has worked since 2002 in Pakistan, the IMF says the monetary policy played a decisive role in driving up inflation during 2004-05 after the low inflation of 1999-2002.

The IMF says inflation rose rapidly in 2004 and remained high throughout 2005 and there is strong evidence that the influence of monetary policy is decisive in raising the inflation rate. “High and persistence inflation is a regressive tax that hurts the poor”, cautions the IMF.

While there is a controversy regarding the extent of poverty, not only the income of the poor matters, but what they can buy with it. Low income and high prices drive the people to suicide.

There is also evidence, says the IMF, that inflation beyond a certain threshold hampers economic growth and financial sector development. That threshold for Pakistan is in the 3-6 per cent range.

In future, the monetary policy should strive to keep itself close to the threshold , but the government says inflation which is now eight per cent will come down to 6.5 per cent next year which in reality will be much higher.

Increased wheat prices do not have an immediate inflationary impact, but when combined with a lax monetary policy as in 2004-05, the level of inflation rises critically. “Pakistan should strive for price stability” says the IMF, which is a dream due to too many price pushing factors.

The World Bank has asked the government to control liquidity in the banking sector as the credit is witnessed in areas in which banks are relatively inexperienced.

The increased liquidity in the banking system has led to rapid expansion of credit in the consumer sector, that could be problematic if corrective measures were not taken, says the World Bank in its aide memoir to the government.

Banks need strengthening their appraisal and risk management systems since much of the credit growth was in areas where the banks were inexperienced, which is acknowledged by Pakistanis as well.

There is also need for close monitoring by the regulator to ensure that the rapid growth of credit does not compromise credit quality and undermine the banks, warns the bank. The State Bank has already issued comprehensive risk management guidelines. It has restricted financing for the purchase of plots unless that is accompanied by construction of houses.

How rigid is the enforcement of the guidelines, how periodic is the review and how much correction has been done is a matter of opinion. The country is full of un-enforced rules and regulations and guidelines which the influential persons and institutions can ignore with impunity.

The World Bank says that Pakistan’s high growth is based on high consumption. While such consumption in India is based largely on higher farm income, it is based in Pakistan more on imports.

What is worse about the high consumption in Pakistan is that it is based on imported goods, mostly luxuries by local standards which have hurt the local industry and have caused a large balance of trade deficit over $10 billion in the 11 months of the current year. This kind of import boom cannot continue for long, cautions the bank.

More is being done now to promote modern farming and making farming more productive. The focus should be on radical farm reforms which are highly productive-than on importing Rolls Royce and Mercedes Benz cars through consumer credit.

Domestic industry with its increasing employment should have a far higher priority than promoting facets of the casino economy. We cannot afford far more unemployment, suicides or poverty driven crimes. The country’s awash with money in the hands of the rich, the corrupt and the criminal elements. A great deal of the money is outside the banking system and the velocity of the circulation of that money is very fast and that adds to the inflationary pressures and such money also escapes taxation.

The private sector credit from banks and specialized institutions was Rs345 billion in this financial year until June 3. The target for the whole year was Rs330 billion. Along with that, the country received record over $4 billion as workers remittances. A good deal of that money has been used for current consumption and much of the rest for speculation.

The controllers of the banking system with their slack control must sit up and think and come up with the right remedies quick and sustain them.

For all the talk about higher investment about oil and gas, and more foreign companies coming in the increase in oil and gas output during the first ten months of this year is only four per cent, while the annual increase in demand is between 10-12 per cent, so we have to import more to fill that gap.

The government has done well in taking the petroleum surcharge out of the tax net and decided that the surcharge will be used to subsidise the petroleum consumers when the prices are very high. Instead of treating the surcharge as a tax and using it for revenue purposes, the government has at last accepted the popular demand after the world oil price has touched $70 a barrel. Let us hope the government will play fair by the consumers.

The government has done well to raise the return on deposits the national savings schemes. Let us hope more money will come to the NSS from the banks which are offering a dismally low interest rate on deposits while charging high rates on lending’s.