Businessmen are fuming over the State Bank’s decision to raise its policy rate by 0.5 per cent to 13 per cent. Their anger is not without justification.
The decision will push the cost of doing business upwards and make their products dearer in the global markets. But did the bank have any choice? Not really. At stake is the eroding macroeconomic stability and wellbeing of the common man. The cash-strapped government’s failure to cut expenditure, increase tax revenues and fix structural flaws in the economy is jeopardising stability and growth. It missed most of the fiscal targets for the last financial year, lived on borrowed money and let the fiscal deficit swell and price inflation spike. This year is going to be no different unless the rulers mend their ways and learn to live within their means. That is unlikely to happen. Foreign creditors also understand this and are no longer ready to pay the bill for the lavish living of our ruling classes.
Islamabad is not alone in bringing the economy to the present impasse. Provinces, especially Punjab and Sindh, have contributed their bit to the problem. They are resisting federal requests to cut down on wasteful spending and tax agriculture and real estate, for political reasons. While raising the credit price, the SBP has assumed that the government will not be able to control its deficit this year either. The government’s borrowing needs from the domestic market are projected to grow in the wake of the falling revenues and the ‘delays’ in foreign assistance because of its failure to keep its international commitments. Workers’ remittances are also showing signs of deceleration. Thus, laxity on the part of the bank could make macroeconomic stability evaporate in the air. Now we are told that the government has decided “in principle” to cut federal and provincial expenditures by up to Rs280bn and impose reformed sales tax. Few believe it. The government’s credibility is at its lowest. What is certain is that the people will soon be paying more for electricity. After all, that seems to be the easiest way of generating revenues.
Source: Dawn.com