Talking business

And now the SBP joins the growing chorus of voices that say the government’s plan to finance its fiscal deficit.


Khurram Husain August 02, 2010

And now the State Bank joins the growing chorus of voices that say the government’s plan to finance its fiscal deficit lacks credibility. Not only that, but the Bank has taken a largely preemptive step to raise the cost of borrowing, anticipating higher demand from the government as the fiscal year unfolds.

The SBP monetary policy announcement comes in the wake of the IMF delaying disbursement of its next tranche – due almost entirely to weaknesses on the fiscal side of things – and the money markets’ demand for a premium on long tenors in the failed PIB auction of mid-July. So now the money markets, the IMF and the State Bank are all saying the same thing: we don’t believe you will be able to raise the kind of revenues you have programmed into your budget.

It’s imperative at this time for the finance ministry to address this collapsing confidence in its fiscal plan. Notice how none of the three major players – the IMF, money markets and the State Bank – are interested in talking anymore. They’re all acting on their lack of confidence in the government’s fiscal numbers. The finance ministry cannot and must not deal with this powerful tribunal’s verdict with silence.

The GST reform now needs to be sent to the political authorities for resolution of the deadlock between Sindh and the Centre. Further discussions between advisors and secretaries are not going to yield the breakthrough. Some hopes were raised that a political settlement might be reached during the meeting on the 27th, but all we saw was the ball being bounced back to the secretaries and advisors.  Credible progress on the GST reform is still elusive, and powerful lobbies within the FBR are intent to thwart things further.

But even if it wasn’t, let’s understand that GST reform is going to take a long time before it starts yielding actual revenue. The problem to be addressed is what to do in the meantime. The last T-bill auction already saw the government lifting more than 30 billion rupees beyond the target it had set for itself, fueling concerns in the market that growing deficits will financed through short-term borrowing. It is this concern the State Bank cited as its reason for the unexpected rate hike.

Compounding problems are the weak projections on foreign inflows. The second half of the last fiscal year saw some relief on the external front as remittances posted healthy returns, exports came in stronger than expected, and a large payment on CSF funds materialised in the last quarter. Looking ahead though, export performance may not sustain itself as world cotton prices begin settling down and official inflows suffer as difficulties with the IMF are sorted out. And any diminishment in foreign inflows is likely to negatively affect market liquidity, further driving up the costs of borrowing.

Yes, it’s imperative that the finance ministry should loudly and clearly speak to the collapsing confidence in its capacity to deal with these challenges. The market is looking for strong leadership at this point, and failure to signal this will only spell more trouble for the fiscal authorities.  Selective conversations with individual reporters that offer vague assurances are not going to cut it. What is needed is a large and visible signal to the markets that someone is in charge, and there is a plan, and this is what the plan looks like. The markets are looking for relief from the sense of drift that characterises present day economic management, and real credible relief, not another attempt at a stirring speech.

the writer is Editor Business and Economic policy for Express News and Express 24/7

Published in The Express Tribune, August 2nd, 2010.

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