THE focus of the country’s economic managers has been on the macroeconomic stability and the growth in the gross domestic product(GDP). The macro-economic stability envisages: (a) reduction in the fiscal deficit from 3.9 per cent of the GDP in fiscal year 2003-04 (FY-04) to stipulated 3.2 per cent in the current fiscal 2004-05 (FY-05) as tax recovery has been doubled since 1999; (b) conversion of current account/ over-all balance of payments deficit into surplus; (c) increasing the foreign exchange reserves currently put at approximately $13 billion (d) containing/ reducing the inflation etc.
What is of the essence for common man is that neither the rise in the GDP nor in the foreign exchange reserves directly benefit or adversely affect the general public. This is because as per the study conducted by the Special Policy Studies Centre, Islamabad out of Re1 increase in GDP, 34 paisa is passed on to the 10 per cent upper income groups which leaves only 64 paisa to be shared by the rest 90 per cent population.
That is why the effect of 6.6 per cent GDP growth in FY-04 and the projected 8.3 per cent GDP growth in the current fiscal FY-05 is not visible to the majority of the population. There are, however, many people who doubt the claim of 8.3 per cent GDP growth in FY-05.
If at all, general public can get relief, it is through the reduction in the inflation. The statistics of the inflation gathered from State Bank of Pakistan (SBP) website is appended in the Table.
There is no denying that poorest suffer the most on account of food inflation. The economic managers inherited general/food inflation of 5.74 per cent and 5.9 per cent respectively which declined sharply during the fiscal years 1999-00 to 2002-03 but the trend was reversed in 2003-04. In that year, though general inflation increased from 3.1 to 4.57 per cent but the food inflation more than doubled from 2.84 per cent to 6.01 per cent.
This was mainly on account of wheat crisis. The hoarders/ speculators making use of the cheap bank credit, minted approximately Rs3 billion tax-free profit as per reports appearing in the print media. The situation could not be contained through monetary policy stance by imposing ban on advances against that commodity.
The central bank acted belatedly and half-heartedly in May,2004 by imposing 50 per cent margin against wheat advances. It would be recalled that sugar crisis had erupted in 1986. At that time, SBP had acted promptly by imposing ban on advances against sugar and precluding opening of letters of credit for the import of that commodity on usance basis.
During 2001-02 and 2002-03, banks were awashed with liquidity on account of diversion of heavy foreign exchange inflows from unofficial to the official channels in the aftermath of 9/11. Finding no outlets for lending at high interest rates, banks reduced the lending rates to the lowest in the country’s history.
How was this done? By squeezing depositors who are getting barely around 1-1.25 per cent interest on their deposits. The private sector took full advantage of this scenario which definitely cut down the cost of production but no benefit was passed on to the consumers. This resulted in the passage of wealth from poor to the rich making the rich richer.
The SBP is supposed to look after the interest of the depositors. But here too, it remained inactive. It rather made arrangement to get the benefits of the low interest rates scenario passed on to the government by selling Treasury Bills at the lowest rates in the country’s history. The SBP has also been pro-active in getting the interest on National Savings Scheme (NSS) instruments reduced from 14-16 per cent per annum to merely 6 per cent per annum.
All the above policies compelled public to divert their hard-earned money to stock exchanges and real property transactions. The common man was also attempted to divert his investment to the bourses and the bubble ultimately bust in March,2005 ruining the common man and enriching a few.
If, as per the claims of the economic managers, the economy had so much strengthened during their tenure, why has it started taking a U-turn since the commencement of the current fiscal. Since July, 2004, SBP has started tightening the monetary policy by raising the interest rates. But the central bank is not sure if the tightening of the monetary policy will effectively work in containing the inflation and more particularly the food inflation as may be seen from its 3rd quarterly report for the current fiscal.
The SBP has called upon the government to initiate administrative/fiscal measures to tackle the issue which, inter-alia, include: (a) reduction (and preferably elimination) of petroleum development levy on key fuels; (b) reduction of sales tax on POL; (c) action against the cartels- cement cartels- as prices of cement are on the higher side due to the cartelization; (d) initiation of anti-hoarding campaign (wheat, sugar and pulses) and making arrangements for essential items through utility stores etc.
What our experience of 1990s teaches us is that increase in the interest rates has not been successful in containing/curtailing the inflation as at that time, even though the lending rates had reached 22-24 per cent per annum, inflation was still in double digit.
The only solace for the common man was that adequate return was available on deposits with the banks and on the NSS instruments. The SBP’s current initiative of tightening the monetary policy is unlikely to get any positive response.
Rather, the chances of the policy back-firing do exist because the businessmen may raise the prices of their products on the plea of increase in the production cost as the interest element is one of the inputs of the production. They did not pass on the benefit to the common man when their production cost was lowered in the cheap interest rates scenario. As for the administrative measures, one should not repose much hope for two reasons: (a) our rulers have no muscles to proceed against the cartels or the big businessmen; (b) bureaucracy is not expected to render any service for the benefit of common man.
So, common man should in any case be, as usual, ready to bear all the brunt of the current increasing inflation scenario and that the budget for next fiscal has in store for them.
As for the external sector, the over-all balance of payments, after remaining surplus during 2002-03 and 2003-04 has gone into deficit to the tune of $ 330 million. Despite that foreign exchange reserves have increased as under:
As on 30th As on 31st
June, 2004 March, 2005
[Figures in million $]
With SBP 10,553.9 10,035.6
With Banks 1,774.0 2,758.0
Total: 12,327.9 12,793.6
The reserves with SBP have declined by about $0.5 billion. The reserves with the banks have increased by over $1 billion which is because of accrual in the foreign currency accounts (FCAs). Though the funds of FCAs held by the banks are counted as a part of the country’s reserves, the same are not available for use by the SBP. So, the net reserves of the country have declined by over half a billion dollars during July, 2004-March,2005.