The ineffectiveness of the Fiscal Responsibility and Debt Limitation Act 2005 and the Central Board of Co-ordination for Fiscal and Monetary Policies, virtually a dead forum—is amply demonstrated by an analysis of the monetary policy statement for second half of the fiscal 2009.

Neither the Fiscal Responsibility Act nor the State Bank could prevent the government from borrowing Rs689 billion in 2007-08, say businessmen.Fiscal deficit was at 8.3 per cent against four per cent stipulated in the law.

The Central Coordination Board of Fiscal and Monetary Policies was set up under 1993 State Bank of Pakistan Ordinance promulgated by caretaker Prime Minister Mr Moeen Qureshi but was later amended. “This board is virtually non existent now’’ the SBP Governor, Shamshad Akhtar disclosed on a private television interview last week.

“I am trying to restore that board but after proper restructuring” she told a questioner, as according to her, the board was originally chaired by a federal finance minister. “The board should be headed by a professional independent person and should have equal representation of the central board of SBP Directors and those of federal government.”

Mr Ashraf Janjua, a former SBP deputy governor said that the board was formed to make central bank an autonomous and independent institution.

Then, according to him, the bureaucrats in finance ministry proposed a monetary board to rein in the State Bank. Finally, the Central Coordination Board for Fiscal and Coordination Policies was the via media arrangement. It held a few meetings and thereafter there were no reports of its deliberations. During these meetings the monetary policies came under focus but the federal government representatives avoided speaking on their fiscal performance.

The SBP Governor Dr Shamshad Akhtar has observed, the government’s excessive borrowing is “totally unsustainable’’ and hence the plea made by the SBP to retire Rs84 billion debt in current fiscal year. Bankers and businessmen endorse Dr Shamshad’s suggestion of “more corrective policy actions at the government and central bank level.”

On its part, the central bank intervened more than three times during 2008 to curb inflation, suppress imports and check on erosion of rupee value. Businessmen were not too happy over tightening of monetary policy in late January, on May 23 and then last Tuesday which has raised bank interest rate.

“A stern warning from State Bank on last Monday brought down KIBOR the next day by about one per cent before the announcement of monetary policy’’, a leading textile exporter said.

The current account deposits carry no interest liability on banks and are almost 24 per cent of total bank deposits. It amply shows that banks were over charging from their clients before SBP warning.

But the SBP governor is not convinced about businessmen’s complaint that rising interest rates were pushing up their production cost. ‘’Financial cost is hardly 2.4 per cent of the non- financial companies listed on stock exchange,” she quoted from an audit report while dismissing the businessmen’s assertion.

Real interest rates are still very low when compared to headline inflation, argues the central bank. The rising interest rates did not curb business demand for bank loans which increased by more than 50 per cent in 2007-08.

Mr Ikhtiar Baig, a senior member of the FPCC’s standing committee on banks and financial credit questioned the SBP governor’s observation that financial cost was merely 2.4 per cent of total production cost.

He said an analysis of textile companies quoted on stock exchange showed that financial cost was 7-8 per cent of the total production cost.

He maintained that rising interest costs have curbed business activities and explained that private sector bank credit demand has risen because of the increase in per unit cost of industrial inputs.

There has been no significant rise in credit demand for project financing or for capital goods import. Otherwise in a depressing business environment, the monetary policy statement of Dr Shamshad Akhtar has failed to excite businessmen.

Businessmen were critical of the monetary policy statement. Leader of a premier trade association sympathised with the SBP governor: “She is a fighting a losing battle’’. Another businessman said that an attempt is being made to put out an inferno with a garden hose. There are fears of another structural adjustment reforms agreement with IMF in making.

Naveed Iqbal, an analyst at a money exchange company however, sees some silver lining. “The international oil price is falling and dollar is getting relatively stronger against euro’’. He perceives these developments as positive but suggests that one should wait and see how this phenomenon unfolds.

“Right now, the central bank is struggling to check on rising inflation and stabilising the rupee’s exchange value’’ he observed. He is confident that within due course of time the central bank and the government will have to work out a joint strategy for pushing up production, “because it is the only answer for many of our problems.’’

Doubts are being expressed if the federal government would be able to mop up Rs1.25 trillion tax revenue and contain expenditure within budgetary limits. There are also doubts whether imports would be contained to last year’s level at $40 billion.

“It is difficult to recover tax revenue of Rs1.25 trillion from an economy under severe stress. The government could have used non- tariff barriers to curb on what is called luxury imports. Even in these difficult times, the market is flooded with cheap imported, smuggled and mis-declared consumer items.