Ask any academic, policy maker or politician even remotely associated with economics about the one, sure kiss of death for a stagnant economy struggling with unemployment and the answer will be near about unanimous – inflation. And when M2 money creation outpaces GDP growth by 4-6 percentage points, CPI is invariably on the verge of becoming the ‘un-bottled evil genie’ graduation text books warn of. And when almost all of that money has gone to government borrowing, as opposed to private sector offtake, the result is almost always disastrous. Seeing as the only mega event to follow the budget will be the next general election (barring the unforeseen), the economic buildup following a supposedly people friendly budget does not seem encouraging for the incumbent government.
It’s interesting that the state bank should attribute the poor state of affairs to “fiscal indiscipline” in Islamabad, especially while its printing presses run overtime to feed unbelievable government addiction to debt. Add to that its inability to treat commercial banks’ chronic risk aversion, and its failure to channel greater liquidity towards private sector investment, and it comes out weak on both monetary stability and overseeing the banking sector. Simply put, Islamabad is bankrupt, and its aid lifeline is weakening, swelling a debt bubble that has already become unsustainable.
There’s no doubt the finance ministry realizes what must be done urgently. Rising prices must be matched by increased production, and employment, otherwise the money multiplier will devastate the middle income group, further driving down productivity, and national income. However, for some time now we’ve seen both fiscal and monetary authorities paralysed when confronted with problems that can and will assume existential proportions if not checked. If inflation continues, and debt builds, and aid dries, and fiscal leakages continue, there are far worse times ahead.