KARACHI, Dec 25: State Bank of Pakistan Governor Shahid Kardar has predicted a fall in the living standard of the middle class in Pakistan in the immediate future as the government — compelled by resource constraints — curtails public spending on utility subsidies.
“The energy subsidy of the government this fiscal year would be Rs226 billion. The government, with a limited resource base, cannot afford to indulge indefinitely. The withdrawal of subsidies might limit the access of facilities to its beneficiaries if their incomes fail to increase enough to cushion the impact,” the SBP governor said while speaking to Dawn.
“We will have to readjust and learn to live within our means as individual, as a family and as a country,” Mr Kardar added.
Answering a question regarding the wisdom of a tight monetary policy if it fails to curb inflation and the focus of the government on resource mobilisation amid falling revenue generation over the last three years, the SBP governor said the government was working on corrective measures to make the fiscal and monetary policy effective.
He refrained from elaborating on details of policy options but did mention a review of the prize bonds’ policy and demonetisation of high-value currency notes.
Mr Kardar, who assumed office in September, candidly admitted to oversimplification of complex issues leading to inappropriate public policy responses.
He believes that the post-flood robust rural economy of Pakistan can discount for the laggard urban growth during this challenging phase.
“If nature permits, the existing farm growth rate can generate sufficient momentum to let the GDP grow at 2.5 to 2.8 per cent this fiscal year and at a decent rate of five per cent in 2011-12.
“The real test would be how quickly and effectively can we support families affected by the flood? The SBP has taken several initiatives to assist in rehabilitation by providing credit at eight per cent, which is six per cent less than the market rate,” he added.
Referring to the gap between the perception and reality he said, “We tend to underrate Pakistan’s economy. It has immense strength and spirit to bounce back. At least in part the resilience is rooted in the vast agriculture sector”.
Reflecting on ways to address visible anomalies, the SBP governor hinted at the realisation not to delay corrective actions that include making the central bank autonomous and independent.
“The amendments to the SBP Act to enhance the autonomy of the central bank have been initiated by the ministry of finance itself. If enacted, they will not allow the government to borrow more than 10 per cent of its revenue of the previous year”.
Mr Kardar was concerned about the lack of planning and financial mismanagement. He felt his friendship with Finance Minister Dr Hafeez Sheikh would serve to evolve a complementary relationship between the SBP and the ministry of finance, as both institutions have had a troubledrelationship in the past.
He found the issue of inflation linked to the ability of the government to contain budget deficit. “Excessive government borrowing is a double-edged sword. It hurts economic fundamentals because of rise in money supply. It also serves to discourage investment as the government crowds out the private sector in the credit market.”
“Government borrowing is the biggest bane of the economy, creating distortions. Inflation cannot be controlled as deficit financing leads to increase in money supply that naturally fuels inflation. The efforts of the government to mobilise additional resources through tax reforms need to be seen in this context”.
Shahid Kardar pinned hopes on rising rural demand for consumer products. Higher net capital transfers to the rural sector in Pakistan because of higher support price and favourable international commodity markets earned the rural population enviable dividends. “It must have trickled down and increased the disposable income of rural households in Pakistan. It explains the rise in demand for certain consumer durables”.