The pretty wide gap between the SBP and finance ministry’s projection of the fiscal deficit – arguably the most concerning statistic at present – epitomises the dysfunctional, distorted state of the latter. Not that the former is in its finest shape. The difference owes not to a breakdown in some econometric model, but ministry optimism regarding projected inflows, pretty sizeable ones we might add, due in the second half of the current fiscal. The central bank’s estimate is more likely not just because exports are down, rupee is depreciating, PSEs are a continuing burden and tax reforms are nowhere in sight, but also because once promised funds are no longer in the offing, both civil and military. And the IMF program is long abandoned, also taking away other multi- and bi-lateral donors that take cue from the Fund.
We don’t expect the finance ministry not to play politics in election year, which is why the central bank must step in. It has leverage, provided it can assert independence and revert to its text-book role of price stability before partaking in other adventures. That it can simultaneously stimulate investment and spending, impacting employment and consumerism, can still help salvage the situation. Again, it will have to draw a clear line in the money market that the government must not be allowed to cross. That, of course, is easier said than done, especially when campaigning is effectively underway and the government’s borrowing binge is not very likely to cease.
Fortunately, whatever the deficit, employment and growth outlook, much good can still be done by unlocking credit markets. Should the SBP put a lid on government borrowing, and flex its muscles as overseer of the banking sector, it can channel substantial liquidity to productive initiatives. How significantly, and how quickly, such measures can bolster growth might surprise many in the finance ministry.
