July 10, 2006	Monday	Jumadi-ul-Sani 13, 1427

THE choice for Pakistan may appear to be between the high economic growth, higher inflation and moderate growth with low inflation. But low growth could mean less employment, low production and less exports.

So, the real option is high growth with policies tailored to keep the inflation low and employment high with considerations of equity prevailing.

High growth is often accompanied by high inflation and larger money supply. But the government has tried to tie both together by having a growth target of seven per cent this year along with an inflation rate of 6.5 per cent. But whether the two targets will move in tandem or not is to be seen.

But the State Bank of Pakistan (SBP) is trying to keep the increase in money supply restrained and the government is trying to improve the supply side so that the essential goods can be available at fair prices. However, the market following its persistent high profit policy, is not going along with the government willingly and the world price pattern, whether that be for oil which has touched $72 a barrel or for sugar which has hit world prices is not helpful to the government.

The government however has to try to make the best of a bad situation and hold down prices as best as it can, while the SBP has decided to continue with its rather tight monetary policy.

The National Credit Consultative Committee has approved a credit plan for the new fiscal year which will increase the broad money by 13.5 per cent or Rs460 billion to meet the demands created by targeted seven per cent economic growth and the inflation of 6.5 per cent as against the monetary growth of 12.8 per cent or Rs380 billion set for last year.

The net domestic assets of the banking system are expected to expand by Rs450 billion this year and the net foreign assets of the banking system are expected to expand by Rs9.8 billion. But the government’s need for bank credit is large indeed and it will absorb Rs130 billion. The last year’s government borrowing for budgetary support too was Rs120 billion.

Credit to the private sector has been considerably increased and the NCC has estimated that at Rs390 billion as compared to the targeted Rs330 billion last year. But the actual private sector borrowing was far more.

Larger tax mobilisation this year along with the heavy borrowing of the government from the banking system would reduce the availability of credit to the private sector. But the public sector development programme has been suddenly expanded to Rs415 billion so the government has to borrow more from the banks.

The SBP governor has appealed to the bank management to reduce the large spread between the high lending rate and the low return on deposits. But businessmen complain that the lending rates of the banks have gone up from 4-5 per cent in 2002 and 2003 to 10-11 per cent. The export refinance rate has risen to a high nine per cent. Businessmen now complain that the financial cost of exports is now 3.79 per cent and there is in addition a 1.5 per cent levy on textile exports.

Businessmen now want not only larger credit, but also for longer terms and on lower interest rates. The fact is that they have not able to accomplish the export target of $17 billion, while the government was predicting that exports would rise to $18 billion. The businessmen complain that the competition to the export trade is increasing steadily around the world under the WTO regime and financial charges raise their cost of production.

The cost of power in many other countries is low and the supply is steady. But the power supply in Pakistan is unsteady and inadequate and subject too much disruption and is too costly. If the industrialists and exporters have to arrange for their own power production that increases the capital cost at a time when the interest rates for borrowing are rising.

So the SBP governor has appealed to the bank to stretch the maturity of the deposits to create room for long-term project lending. Their preference for short term-lending and promoting consumer credit has to give way to lending for long-term project financing. So that more industries could be established instead of more money going in to trade and the service sector.

Such appeals have had little effect on the banks that enjoyed a 99 per cent increase in the profit last year. The government and the SBP do not want to make new laws for such purposes in a market economy in which the private sector is the prime mover with the government taking the backstage. But the private sector while enjoying the benefits of the market economy is not ready to make the kind of concessions essential to make the free economy popular and a success.

The time has come for major decisions by the government and the private sector to modernise the economy. The government is talking of public-private partnership along with speedy privatisation of the public sector. Unless the people see the freedom for the private sector and the varied benefits given to it, including larger bank credit as benefiting the people as a whole, there will be little enthusiasm among the masses for the public- private partnership.

The private sector is still relying on the old monopoly and cartel system for fixing prices, whether that be of sugar or cement or other major items. There has to be a world of change in the private sector outlook if the nation and its people have to gain by the new freedom conferred on the private sector.

It is for the leaders of the private sector to play their part honestly and fully. Some of them have got in to the parliament and some have become ministers. Instead of exploiting such positions for their own advantage, they should strive for a larger and more open economy.

In spite of the rather tight monetary policy followed by the government, more money is coming in as foreign investment and workers remittances which together account for about $8 billion dollars. In addition, the market is also awash with money made quickly through the stock exchanges and the real estate deals.

In such an environment, the tight money policy of the SBP cannot be too helpful in stabilising prices and the effort of the government to raise the number of the utility stores and make them play a larger role in holding down prices has a limited, though useful role.

Hence the supply side of the economy deserves far more attention from the government. It is not enough if polices are made and announced or if the prime minister directs the chief ministers to hold down prices. What matters is achieving positive outcomes and bringing down the prices and keep them stabilsed so that the 6.5 per cent inflation becomes a reality and not yet another illusion.