THE economy is in the grip of stagflation with expansionary fiscal and tight monetary policy working at cross purposes.Bankers making windfalls on surging risk-free investment in government securities advocate a high interest rate to curb inflation while inflating government debt servicing cost and its fiscal deficit. Depressed commodity producing sectors seek substantial cut in the State Bank policy rate in order to reduce their financial charges and improve margins.

That the fiscal and monetary policy need to be synchronised to pull the economy out of stagnation as quickly as possible, cannot be denied. The problem lies in finding the right solution to make the two work in tandem. The over-arching issue in determining central bank policy rate is: How long will the pursuit of stability keep economic growth hostage? How long is the common man expected to suffer rising unemployment and poverty. Will the exit of Shahid Kardar make a difference?

Time is running out for a tight monetary policy. In trying to pursue an elusive macro-economic stability, financial wizards at the helm of affairs are losing their jobs one after the other both in the ministry of finance and the State Bank — too many heads to count in a short span of three years.

Three SBP governors replaced and the same deputy governor temporarily holding the top slot for a second time.

Of course, the government, particularly the elected representatives, are the easiest target for any failure, whether of its own or that of technocrats, for those who have been for long pampered military dictatorships. Technocrats have yet to learn that they have to assist a democratic government with a much wider mandate compared to their own individual ( read segment) sphere of responsibility.

In essence democracy is citizen-based (the voice of the people is the voice of God ) while technocracy, nurtured by dictatorships, detests “populism.” In the current phase of development of political economy, domestic compulsions are over-riding external influences. The realities have changed and call for policy shifts.

The loud and clear message that politics (not necessarily politicians) is in command since the last days of General Musharraf, has not gone home to many. Political economy has its own dynamics Technocrats tend to forget that long-term economic stability is a product of growth and development. That firefighting with a tight monetary policy or injection of foreign funds is no durable solution, as witnessed over and over again in Pakistan. They have to go back to basics to revive the economy.

While domestic economies stimulated by foreign capital and financial inflows tend to fuel inflation, local savings and investment can spur growth with low inflation. By giving negative returns on PLS deposits, banks are discouraging savings and investment. The banking lobby does not allow institutional growth of the Central Directorate of National Savings – a source of major borrowing for the government which is largely non-inflationary.

The State Bank’s failure to grasp the big picture is evident from its tight monetary policy. The central bank has been ignoring its responsibility to help kick-start the economy by sticking to a spurious financial model. With growth in industrial along with agricultural production sluggish, and unemployment and poverty rising rapidly, it is not demand but supply side constraints that needs to be addressed For high growth to happen, the economy needs monetary stimulus , and not a tight monetary policy.

However, the banking system, made prosperous by investments in high yielding government securities, is risk averse. The State Bank has raised interest rates but failed to discourage excessive government borrowing. Then it delivers a sermon that government should stop its excessive borrowing while the banks continue to invest in government securities with a zeal and zest not witnessed before. The central bank seems to making itself redundant, at least on this issue.

With a weak social network in the country, the SBP fails to recognise that unemployment hits the common man in Pakistan more severely than inflation, as stated by no less a person than PPP founder Zulfiquar Ali Bhutto in his letter to Benazir Bhutto from his death cell. There is an army of unemployed educated youth ‘ unnoticed’ on the streets.

Some bankers have reportedly suggested that the State Bank should be responsible only for targeting inflation and should have nothing to do with the growth of the economy because the growth issue invites government intervention in the monetary policy. It means that the question of trade off between stability and growth should be outside the mandate of the central bank.

The proposal comes at a time when the disconnect between domestic money and productive pursuits is widening under the Anglo-Saxon financial model blindly copied by the fiscal and monetary authorities under stewardship of Mr Shaukat Aziz. If the bankers’ suggestion is accepted, the banking system would benefit from government borrowing----, lent at exorbitant interest rates with secure and guaranteed returns----, by linking lending rates to inflation rate, with negative returns(de-linked from inflation) to the depositor. The widening spread between lending and deposit rates in Pakistan is one of the highest in the region and the world, demonstrating the inefficiency of the local banking system. Banks want ’rights’( read unearned incomes) with no responsibility.

With volatile interests rates hurting businesses, there is widespread evidence that many companies, listed and private, have stopped borrowings from banks. A leading industrial group says that four out of its seven companies listed on the stock exchange are doing business without bank credit. That this is happening is demonstrated from the government’s decision to allow tax holiday on equity investment without bank borrowings.

And more and more individuals are investing in Pakistan Investment Bonds, Treasury Bills, National Savings Schemes in preference to investment avenues offered by the banks and non-bank financial institutions.

If this trend continues, the bank assets as a ratio of GDP will drop, if it has not already started falling because of a slow economic growth. This trend also indicates that the hegemony of the financial aristocracy that saw two bankers Shaukat Aziz and Soomro rise to the position of prime minister and interim-PM, is coming to an end. A new equilibrium is evolving between agriculture, industry and the banking sector.