950805

Monetary management

plans defeated by

fiscal lapses

RECORDER REPORT

KARACHI: Efforts towards tight demand management policy by the monetary authorities have been defeated on account of fiscal slippages in 1994-95 resulting in growth of money supply by about Rs 110 billion or 16.5 percent, it is reliably learnt.

Monetary assets had grown by Rs 62.6 billion by the middle of the financial year, after which renewed efforts were made for resource mobilization, by restoring the control of the Central Board of Revenue to the Ministry of Finance. Hitherto it was an independent division.

Despite the impressive increase in revenues between January and June 1995, the expenditure side could not be effectively controlled. As a consequence, it is believed, government borrowing from the banking system for budgetary support was around Rs 55 billion as against the targeted level of Rs 19 billion.

This Rs 36 billion increase in government borrowing resulted in monetary expansion of Rs 110 billion as against the targeted level of Rs 78.445 billion fixed by the National Fiscal and Monetary Board on the recommendation of the National Credit Consultative Council (NCC), taking into account the targeted inflation rate and the existing overhang in the economy.

Domestic credit expansion had been projected at Rs 65.445 bilion i.e. 9.64 percent, by the NCC in the Credit Plan 1994-95. At the end of the financial year it has been placed at around Rs 85 billion or 12.5 percent.

Credit to the private sector expanded by Rs 67 billion as against the plan estimate of Rs 55.445 billion. The commercial banks accounted for credit expansion of Rs 52 billion as against the plan projection of Rs 42 billion. Besides the private sector proper, Public Sector Enterprises, which from part of the Credit Deposit Ratio, made higher borrowing than had been projected earlier.

Other items (net) exerted a contracting impact of around Rs 12 billion. And the foreign assets during the year expanded to over Rs 25 billion as the Government spent Rs 6 billion from the Rs 29 billion earned from the sale of Pakistan Telecommunication Corporation shares.

INFLATION: The Credit Plan monetary targets were based on the expectation of a rate of growth of 6.5 percent. However, the growth was lower at 4.7 percent. As such, even if the monetary expansion was contained at the projected level of 11.83 percent it would have resulted in higher than anticipated inflation.

In 1994-95 the economy suffered cuts from a double edged sword. Not only was the growth lower by 1.8 percent, but the monetary expansion was higher by 4.7 percent (16.5 instead of 11.83 percent) resulting in the inflationary gap to grow from 7 to 13 percent. Last year was the third year in a row that the growth was lower than targeted level. In this situation, mney growth should have been lowered to take this setback into account. However, the authorities failed to make the adjustment mainly on account of the rising demand for credit by the Government sector.

Corporations and entities not part of the budget continued to borrow domestically and internationally, while the banking system was forced to maintain its policy of concessionary credit to government sponsored schemes.

According to prevailing economic theory, government borrowing beyond sustainable levels, whether for budgetary support or for specialized politically motivated schemes or for public sector corporation programmes - all result in money creation. Pakistan's failure to lower the level of fiscal deficit since 1992-93 in real terms is a direct consequence of its failure to lower inflation.