Zero growth and high inflation
The finance ministry appears to finally have woken up from its stupor.
The finance ministry appears to finally have woken up from its stupor. The economic adviser’s wing of the ministry announced inflation and GDP growth rate projections that were as shocking as they were breathtaking in their brutal honesty. Inflation is now expected to reach its previous peak of 25 per cent yet again this fiscal year and GDP growth is expected to be non-existent. If that does not sober up the nation’s economic managers, then perhaps it is time for them to tender their resignations. Much of this, of course, is nature taking its toll on the economy. The country has yet to fully grasp the mind-numbing devastation caused by the flood this year. But while there is something to be said about not expecting wonders in the midst of a natural disaster, there is still much that the government can do to ameliorate the negative impact on the economy. Unfortunately, we fear that there seems to an extreme lack of political will to get the job done.
As has been pointed out by this newspaper in the past, by vigorously redirecting the federal and provincial budgets, at least half of the immediate economic impact of the flood can be dealt with. Aid agencies and international financial institutions have pledged and made available yet more finances for the government’s use. There need not be a widening of the fiscal deficit, certainly not a major one, if the administration is diligent enough to adjust their plans according to the hand that they have been dealt. The government is also predicting an extreme surge in inflation, though there seems to be little clarity as to why this should be so. Yes, a significant portion of some crops have been wiped out but as was pointed out in the report itself, international commodity prices, apart from wheat, seem to be relatively low and are expected to remain so over the coming months. If importing food can alleviate a temporary food shortage, then why the expectations of a massive price hike? The truth is that the government intends to take what has now become the fiscal equivalent of a narcotic. Every time there is a fiscal problem, rather than working towards a solution, the government simply prints more money. That was the unsaid fact that the report wished to highlight by stating that it expected inflation to skyrocket. It was not just an assessment of what the government expected. It was also an estimate of the negative impact of what the government’s reaction to the crisis will likely produce.
Yet one need not lose all hope just yet. The economic wing of the finance ministry appears to differ with the finance minister’s office itself on the state of the nation’s fiscal health. It joins the State Bank of Pakistan, the International Monetary Fund and the Karachi bond market in expressing that level of scepticism. While many see this inconsistency as troubling, we would like to view it as a vigorous, open debate amongst policy makers on a serious issue of national importance, the fruits of democracy as it were. There is also a chance, of course, that the finance ministry is not quite as divided amongst itself as it appears and is simply playing the expectations game. If it announces that it expects zero per cent GDP growth and 25 per cent inflation and the reality turns out to be better (it certainly cannot get much worse), then the administration will pat itself on the back for a job well done. As a tactic to manage political expectations, it may well work. If the intention is to keep the political wolves at bay while serious economic fire-fighting strategy is hashed out, then one would approve. If, however, the report is designed as a white flag of surrender to the admittedly-challenging circumstances, then a more damaging move by the government could not be imagined. One can only hope that the former assumption is correct. Because if it is not, then the worst of the finance ministry’s projections may well come to pass.
Published in The Express Tribune, August 24th, 2010.
As has been pointed out by this newspaper in the past, by vigorously redirecting the federal and provincial budgets, at least half of the immediate economic impact of the flood can be dealt with. Aid agencies and international financial institutions have pledged and made available yet more finances for the government’s use. There need not be a widening of the fiscal deficit, certainly not a major one, if the administration is diligent enough to adjust their plans according to the hand that they have been dealt. The government is also predicting an extreme surge in inflation, though there seems to be little clarity as to why this should be so. Yes, a significant portion of some crops have been wiped out but as was pointed out in the report itself, international commodity prices, apart from wheat, seem to be relatively low and are expected to remain so over the coming months. If importing food can alleviate a temporary food shortage, then why the expectations of a massive price hike? The truth is that the government intends to take what has now become the fiscal equivalent of a narcotic. Every time there is a fiscal problem, rather than working towards a solution, the government simply prints more money. That was the unsaid fact that the report wished to highlight by stating that it expected inflation to skyrocket. It was not just an assessment of what the government expected. It was also an estimate of the negative impact of what the government’s reaction to the crisis will likely produce.
Yet one need not lose all hope just yet. The economic wing of the finance ministry appears to differ with the finance minister’s office itself on the state of the nation’s fiscal health. It joins the State Bank of Pakistan, the International Monetary Fund and the Karachi bond market in expressing that level of scepticism. While many see this inconsistency as troubling, we would like to view it as a vigorous, open debate amongst policy makers on a serious issue of national importance, the fruits of democracy as it were. There is also a chance, of course, that the finance ministry is not quite as divided amongst itself as it appears and is simply playing the expectations game. If it announces that it expects zero per cent GDP growth and 25 per cent inflation and the reality turns out to be better (it certainly cannot get much worse), then the administration will pat itself on the back for a job well done. As a tactic to manage political expectations, it may well work. If the intention is to keep the political wolves at bay while serious economic fire-fighting strategy is hashed out, then one would approve. If, however, the report is designed as a white flag of surrender to the admittedly-challenging circumstances, then a more damaging move by the government could not be imagined. One can only hope that the former assumption is correct. Because if it is not, then the worst of the finance ministry’s projections may well come to pass.
Published in The Express Tribune, August 24th, 2010.