Can a stable monetary policy cover up fiscal ‘indiscipline’?
Markets have grown used to witnessing a discord between monetary and fiscal policies.
To what extent and for how long a stable monetary policy can cover up fiscal indiscipline is a subject worth probing by monetary economists.
Not only did former finance minister Ishaq Dar react sharply to the State Bank of Pakistan’s (SBP) July 5 move of letting the rupee fall by 3.1 per cent in one go, he also reminded the nation of the presence of a fiscal and monetary coordination board that he thought should have been consulted in case the central bank wanted a major exchange rate readjustment.
One expects that the minister would be equally perturbed over fiscal indiscipline which, at times, makes it difficult for monetary policy makers to set policy direction. The SBP, in its latest monetary policy review, has once again kept its key policy rate unchanged at 5.75pc. And it has cited many plausible reasons for the decision.
But let’s take a quick look at some facts.
Fiscal deficit has shot through the target, government borrowing remains excessively high, circular debt of the power sector is being restructured, tax collections are not only short of target but continue to remain at around 50pc of the tax capacity, and development budget disbursements still remain short of the original targets.
“All these things are symptoms of continued fiscal indiscipline,” opines a source close to the monetary policy committee of the SBP. “Whether, and how, a stable monetary policy can be helpful in promoting economic growth amid such fiscal indiscipline must be examined for improving the quality of policy inputs.”
While announcing its monetary policy decision, the central bank gave a crisp account of some current macroeconomic indicators besides detailing its own assumptions.