The central bank contradicts itself. First it explains its (obvious) “dilemma” – excessive government borrowing has compromised advances to the private sector. Then it expects the incredible – the 200 percentage point cut so far this fiscal should translate into increased private off-take during the second half. In effect, cutting rate or holding steady, recent developments point towards a different sort of dilemma, where SBP autonomy is diluted by exogenous events no matter how strongly it postures to safeguard it.
Strangely, monetary policy has been revolving around the current account deficit practically since the onset of the ongoing fiscal year. First, inability to generate funds fueled excessive borrowing, diluting a tight monetary regime meant to pressure inflationary trends. Borrowing remained high even as unexpected export windfall swelled reserves. Then when tightening screws did not (obviously) arrest high prices, the policy engine was reversed to stimulate growth and encourage private sector investment. Yet the government remained excessively present in the money market, feeding into a risk-averse banking structure reluctant to extend liquidity to private initiatives.
The monetary policy statement fails to notice in as many words that the economic engine has stopped responding to interest rate toggling. But perhaps its most penetrating finding is the need for the government to initiate comprehensive tax reforms. Simply put, the sooner Islamabad falls on its own funds to service its running expenses, the sooner banking sector liquidity will be channeled into investment, employment generation and GDP growth. That the central bank has been unable to impress this simple economic rule upon the government obviously does not speak well of its prized autonomy. And commercial banks, too, find it only too convenient to lend to the government as opposed to private investors. Best not indulge in risk management and turn attention to mounting NPLs again. At some point the government’s addiction to borrowing will have to stop. Unfortunately it seems that will not happen till hyper-inflation and public revolt deliver a stern message.