Fiscal discipline is the key

THE State Bank of Pakistan (SBP) is certain that most of the present problems of the economy are rooted in the widening fiscal deficit of the country. According to its second quarterly report for the year 2007-08 released on 31st March, the fiscal deficit during July-December, 2007 is estimated to be as high as 3.6 percent of the estimated annual GDP or nearly twice the figures for the last two years. This had troubling implications for vital areas of the economy. “Support to aggregate demand due to fiscal deficit contributed directly to a rise in monetary aggregates, raising inflationary pressures, complicating monetary management, and stoking the growth of the current account deficit. International credit rating agencies have already cited the growth of the fiscal deficit as a key negative indicator for Pakistan’s sovereign credit rating”. The combination of rising fiscal deficit and weak external receipts has pushed government borrowings from the State Bank to a record Rs 359.3 billion during July-March, 2008 as compared to only Rs 25.6 billion in the corresponding period of last year. This has been instrumental in sustaining the growth in money supply at around 17.6 percent, significantly offsetting the central bank’s efforts to tighten monetary policy. The inflationary impact of widening fiscal deficit and government’s increasing reliance on State Bank’s lending was aggravated by an unanticipated strength of international commodity prices, anti-competitive market structures and practices in the domestic market, as well as supply disruptions. The State Bank has projected inflation rate to be in the range of 8.0-9.0 percent for FY08 as against the target of 6.5 percent for the year. It is of the view that “the government has limited options to ease inflationary pressures. Efforts to reduce government subsidies on fuel will raise inflation in the short-run. Further, given limited fiscal space, any subsidies need to be carefully targeted and should be limited in scope”. Also, policy actions should not distort price signals as these were essential to ensure investment and productivity increases needed to remove shortages and modulate consumption in future.
The government’s desire to reduce current cost pressures in the domestic economy through a subsidy on fuel prices has the unintended consequence of supporting the widening of the current account deficit, as demand was not rationalised to reflect the higher international prices. The State Bank has also made a poignant remark about the size of the fiscal deficit by observing that the actual deficit at 3.6 percent may be understated as a part of the subsidy on fuel prices during July-February, 2008 was not financed from government account. The impact of strong domestic demand (emanating mainly from growing fiscal deficit) and higher international commodity prices was also reflected in the deteriorating external imbalances during FY08. As a consequence of rising import growth and slow growth in textile exports, the current account deficit may reach around 6.0 percent of GDP. According to the State Bank, “the growth of current account deficit indicates that the exceptional fiscal expansion supported aggregate demand in the economy”. In the past, Pakistan was able to sustain current account deficits by encouraging non-debt creating financial inflows but, with the change in investment conditions, sustained external sector deficits could pose risks to the macro-economic stability. Reflecting a sharp increase in current account deficit, overall foreign exchange reserves declined to $14.0 billion at the end of February, 2008 from $15.6 billion at the close of June, 2007 while Pak rupee depreciated against US dollar by 3.5 percent during this period. An area where the State Bank does not feel very much disconcerted is the growth rate of the economy. Although domestic and international shocks have taken their toll, the economy was expected to turn in a reasonable growth performance during FY08, albeit substantially lower than the target.



How to lose an election

SPEAKER of the US House of Representatives Nanci Pelosi has now joined a debate that has occupied this space for some time now, that the Clinton-Obama Democratic nomination race is doing the party more harm than good. Pelosi is not wrong in advocating a quick end to the contest, considering that the ultimate party objective is winning the presidency, which the increasing split could well compromise. Going by their personal positions, Clinton’s refusal to step aside is just as understandable as Obama’s rejection to pressure her. Leading the next major Pennsylvania primary polls by 10 points, she is not exactly off the mark in expecting a much needed shot of adrenaline for her campaign. Obama scores points of his own by saying she should compete as long as she is able, for the moment steering the slugfest away from personal hits that have undermined the credibility of both to no small extent. It is possible that an April 22 defeat in Pennsylvania might push Hillary to favour the greater good argument and bow out, allowing the party to formulate strategies for their eventual nominee, something on which Republican McCain has left them far behind. Six months ago few wagered on a Republican victory. It is ironic that Democratic candidates’ strong showing has led to reversal of opinion in large numbers, with even senior Democrats fearing a Republican free ride if Clinton and Obama don’t wrap up their thing soon. Internal damage is likely to turn out greater than expected because the intensity of the struggle pushed both Democrats to turn to politics of personal insult, reflecting poorly on contestants for the most powerful job in the world.
Adding to problems is the unlikelihood of either candidate bagging the required 2,024 delegates in the remaining primary elections, even though Obama leads by a slight margin. That is why Clinton is banking on winning a larger share of the national popular vote which might see her securing the backing of so-called superdelegates, upsetting the balance. From the looks of it, it seems the Democratic candidate will not be decided before the party convention in August. That means party fortunes are almost sure to plunge just as they enter the final presidential election campaigning phase. To blunt the downside, it would be prudent on part of senior members to prepare contingency plans in advance, just so the internal split really doesn’t end up squandering the finest electoral opportunity coming their way.

—Khaleej Times