The central bank’s tight monetary policy is the root cause of all economic ills. It has not only wiped out the GDP growth but also caused double-digit inflation, curtailed foreign and domestic investment, dropped tax-to-GDP ratio and swell fiscal deficit of the country. The State Bank of Pakistan (SBP) revised the discount rate from 10 to 12 percent in 2008 on the pretext to rein in the rising inflation, but the move proved to be counterproductive. Figures show that in 2007, discount rate was 10 percent while inflation was 7.97 percent, GDP growth 7.0 percent, tax-to-GDP ratio 11 percent, fiscal deficit 4.3 percent and dollar was hovering around Rs60.83. With the change of government in 2008, new economic managers took sharp u-turn in its existing policies. The central bank made upward revision in discount rate, which kicked out the private sector from economic cycle as a result GDP growth dropped for seven percent in 2007 to 4.4 percent in 2008.
Though, by suppressing demand, the SBP squeezed inflation by 0.2 percent in 2008, but it compromised on all major economic targets. Figures illustrate that by tightening monetary policy, not only had the country witnessed a huge flight of capital but the tax-to-GDP ratio also dropped from 11 percent to 10.4 percent, fiscal deficit swelled from 4.3 percent to 7.4 percent and rupee slid sharply by over 10 percent against greenback.
Similar trend has been witnessed in the following years. Figures underline that in 2009, the central bank further increased the discount rate to 13 percent, which resulted in a situation where GDP growth shrank by 2.4 percent, tax-to-GDP ratio declined to 8.4 percent, inflation jumped up from 7.77 percent to 20.5 percent and rupee depreciated against dollar by another 20 percent (Rs80.45) against dollar.
Neither government nor the SBP have realised that the monetary policy is deteriorating in terms of both the economy and growth. In 2010, the central bank further swelled the policy rate, which helped the country to rein in inflation as demand had already been over-killed, but it increased fiscal deficit to five percent and further declined the rupee value. However, in 2010, 4.0 percent GDP growth was witnessed, which helped slightly increasing the tax-to-GDP ratio.
Although, the government attributes low growth on devastating floods last year, economic experts co-relate it with the policy rate. Numbers show that in 2011, the central bank increased the discount rate to 14.5 percent, which increased the inflation (15 percent) and fiscal deficit 6.5 percent.
Economic experts argue that both the government and the central bank are equally responsible for the economic mess. The SBP restricted the money supply to private sector to cut inflation by tightening the monetary policy, but the move provided opportunity to the government and it borrowed heavily from the banking sector.
They indicate that domestic debt is hovering over Rs700 billion, which has negative repercussion on both the government and private sector. Banks are reluctant to lend to private sector owing to higher risk, while the government is paying higher mark-up that result further rise in inflation. Economic experts stress that relaxing the monetary policy will encourage private investment and help achieving growth target, reducing inflation and fiscal deficit, improving tax-to-GDP ratio and overall economic environment.
