The State Bank of Pakistan, at its Board of Directors meeting on Friday, approved the decision to keep its policy rate unchanged at 9.5 percent, in its monetary policy review, but has also pointed to the challenges that prevent giving a greater stimulus to the economy. The biggest challenge is probably the government’s failure to control its extravagance, as a result of which it has run up a massive deficit, and the fiscal deficit of 4.7 percent is expected to be missed by a wide margin. This deficit drives the private sector out of the market for credit, as the private borrower must repay from sales or his own pocket, while the state pays from tax revenue. Thus it is relatively easy for the government to borrow without any concern for the interest it might pay. As the government owns State Bank, it can make it print notes. The government has failed to control either its expenditure or increase its revenues. Revenues have been restricted by the tax exemptions granted, especially on agricultural incomes, and particularly to legislators. With the losses of public sector enterprises also to be borne, as well as the losses incurred in the energy sector, the situation is parlous.

Such a situation demands that money not be wasted, for this in turn puts pressure on inflation. Apart from its general responsibility to maintain prices, the government cannot like the news that the State Bank brings. Inflationary pressure is returning because of government extravagance. The deceleration in inflation at the end of last year has not lasted, and December saw it come back. Any plans the government might have made on the strength of that have been defeated already. Though rate cuts might not help the government in time for the election, they could be helpful to the economy, and it would have been only appropriate for the State Bank to have loosened the reins further.

If SBP is to use the money supply as a policy tool, it must not allow it to be held hostage by a small coterie, but must play a more proactive role in persuading the government to do what it is supposed to at all times, not just situations like this: control its appetite for money. It is the State Bank’s duty to play a more proactive role in persuading the government to take it seriously, and not to regard it as a sort of machine for making money out of thin air, as it seems to at present. With a general election about to take place, it needs to convince the voter that it is a responsible economic manager.