Wednesday, April 28, 2021

Economic Hit of Pakistan and Illusion of Monetary Policy's Independence from Fiscal Policy

Central Banks are required by law everywhere to manage and control monetary policy or value of money. There is nothing "natural" about value of money or forex rates. Monetary policy (always artificially crafted) works in tandem with fiscal policy and international policy to establish value of money. Tools used by fiscal/monetary policy include (1) interest rate changes, (2) unemployment rates, (3) inflation reports, (4) gross domestic product numbers, (5) manufacturing data, and (6) commodities. 




Macroeconomics 101 course has chapters on Monetary policy where SBP (central bank) is given all the tools, strategies and techniques to control (of course artificially) value of money or exchange rate. Mantra of Central Bank autonomy and "artificial" forex rates is taught by IMF/World Bank to nincompoop policy makers of developing countries through their economic Hitmen/henchmen. See how USA defends value of dollar through trade wars, even military wars, regime changes and neocolonial hegemony.

Economic Hitmen of IMF and their neocolonial implants in bureaucracy and judiciary destroyed the economy of Pakistan by (1) fixing interest rate to high 13.5% when countries around the world were decreasing it to 0% or even negative interest rates, (2) hounding the bureaucracy by NAB to abandon all the development projects, stall CPEC thereby substantially reducing the employment, (3) increase dollar rate to "artificial rate" of Rs 160+ which triggered massive inflation as our machinery and other inputs of manufacturing are sensitive to import prices, (4) massively reduce GDP by campaigns against small shopkeepers and hawkers in the name of anti-encroachment drives uprooting businesses established for decades paying rent and taxes to government in Saddar and other areas around the country, and unleashing NAB on even private businesses, (5) stalling LSM and other manufacturing by increasing cost of imports, massive increase of utilities and costs of inputs and (6) creation of artificial shortages of petrol, LNG, commodities through political witchhunt of businesses and big growers in the name of Mafias destroying the commodities sector.

Please note that fixed or pegged rate is also determined by the government through its central bank. The rate is set against another major world currency (such as the U.S. dollar, euro, or yen). To maintain its exchange rate, the government will buy and sell its own currency against the currency to which it is pegged. 

How Economic Hitmen duped IK's policy to astronomically increase the loan interest burden on Pakistanis.
  1. By increasing the policy rate from around 5% to 13.5% after tabdeeli, IK government doubled the interest payments (markup expense) to nearly half of the total expenditure. That is double of what was being spent during previous regime.
  2.  Markup suddenly became the single largest outlay even more than the entire military expenditure and military pensions.
  3. To compensate for this government had to stop/slow down all development expenditures, forcing an increase in utility rates and petrol prices, thereby severely decreasing the GDP and employment.
  4. SBP demand based rationale was that higher policy rates will reduce inflation. However, inflation in Pakistan skyrocketed to around 12-14%. SBP demand rationale was contrary to the cost rationale emerging worldwide where countries like Brazil had by decreasing the policy rate decreased their inflation. Ironically , SBP website shows research papers which also establish that Pakistan's inflation will decrease with decreasing policy rate.
  5. The myth sold to Pakistan through the Economic hit media brigade that Pakistan has too much debt. This is again contrary to the fact that many of the countries around the world have even hundred percent to 200 percent debt to GDP ratio, and they are not having such problems. Analysis shows that it is not the higher debt, but the higher policy rates which creates the burden. Most of the countries that have higher debt to GDP ratio than Pakistan have policy rate of less than 2% , in some cases even negative policy rates. Pakistan suffered because of high policy rates not because of high debt.
Do you know that yearly pensions expenditure of government is as large as the yearly civil government expenditure.

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