Friday, June 13, 2008

Honest about Inflation

Unlike his Sri Lankan counterpart (who, in his defence doesn't have a clue about these things) the finance minister of Pakistan, Sayed Naveed Qamar, has admited that government is responsible for inflation in that country, which stands about an "all time high" of 11% (Sri Lankan inflation is at about 26% under a supressed index). Here's an excerpt from his budget speech :
There was a phenomenal build‑up in subsidies in the budget, which are largely responsible for this huge deficit. These subsidies, totaling Rs. 407 billion include; petroleum Rs. 175 billion; electricity Rs. 133 billion; wheat Rs. 40 billion, and textiles and fertilizers Rs. 48 billion, of which only Rs. 114 billion were provided in the budget;

(6) Largely due to an exceptionally high fiscal deficit, balance of payments is facing unprecedented deficit as well. The current account deficit is projected at $ 11.9 billion or 7 % of GDP;

(7) Reserves have declined from a high of $ 16.5 billion in October, 2007 to less than $ 12.3 billion as at end April 2008. This has put pressure on the exchange rate which has depreciated by nearly 6.4 % during July 2007 to April 2008;

(8) Much of the deficit had to be financed from borrowing from the State Bank, which is like printing more money. As much as Rs. 551 billion (up to May 2008) have been borrowed from the central bank, which is unprecedented in country's history. It is not difficult to imagine what this printing of money means. With more money and no new production, only prices are likely to increase, which is what is happening. We have to stop this process otherwise the inflation will be running much higher than what it is at present, and as I noted it is already highest in country's history. [link] (emphasis mine)

Monetary policy, especially when there is no central bank indepdence (like in Sri Lanka, possibly even Pakistan) is inevitably linked to fiscal policy. At least Naveed Qamar has the good sense to admit that. Someone forgot to tell this to Sri Lankan policymakers.

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