Fiscal 2010-11
Following the suspension of Pakistan’s stand-by agreement with the IMF, says the State Bank in its annual report, one of the biggest challenges of the government is financing its fiscal deficit. This would be a nervous time for the central bank. Because the natural impulse of governments, especially this one, is to bridge the gap by borrowing from the central bank. The latter, of course, doesn’t just fork it out on its own but prints the same. This causes inflation; the old mechanics of too much money chasing too little goods. But it also reduces the SBP’s policy leverage as well. Its position as the national mint, after all, is one of the principal policy tools that it has. Any and all demands for printing more notes limits the actionable space of the central bank.
Now the government can, if it wants to avoid the above, borrow from other domestic sources. This is also not without its problems. Huge governmental borrowing causes the “crowding out” effect, curtailing the private sector’s access to credit. When the government’s credit grew by a whopping 74 percent, private credit grew by only 4 percent.
To attribute all of this year’s inflation (double digit, again) on governmental borrowing would be erroneous. The devastating floods played a huge role. As did other supply side factors like the rising international prices of fuel and also agricultural products.
Despite all these constraints, the economy grew by 2.4 percent. Not stellar by any account but considerable, given the circumstances. The future looks uncertain and the government really should get its act together. A healthy prescription could be ensuring tax revenue increases through tax reforms which could help bridge the deficit; an investment in the infrastructure to attempt to undo the flood damage and, lest this not been forgotten, power sector reforms. It was a dicey year for exports for many reasons but power outages played a pivotal role in rendering our exporters uncompetitive.