Fourth Pillar of Monetary Policy

Lahore 7th Feb 2009  In addition to theoretic tasks assigned to Monetary Policy makers and tools available, GOP in total isolation from SBP has adopted its fourth pillar to regularize the flow of money in the system through levying 200% tax on POL pricing index. Crude oil on average is trading at US$35 a barrel translating its cost to PKR 17.10 per liter exclusive of refinery and logistics cost against its market price of PKR 57.90 per liter.

The entire chain is helping the government of Pakistan to mop close to fifteen billion rupees on daily basis permanently against repurchase option available in Open Market Operations (OMO) by SBP.

One of the main components of inflation targeted monetary policy is to regularize price mechanism of basic ingredient of production, oil. On the whole, fiscal deficit is being financed at the cost of interdependent tools of monetary policy. Small tweaking in some government controlled commodities will bring the entire financial system under pressure into order.

 

Keeping discount rates intact to control multiplier effect of lending, reduction in oil prices will significantly bring cost of production & cost of living down by 40% resulting into increased spending by consumers & competitiveness in export oriented products.

 

 

 

Consumer spending will make tax base broader & fiscal surplus can be achieved with some promising opportunities for foreign direct investments by Large-scale-manufacturing giants, looking for opportunities to cut their costs while traversing through recession. The bounce back after the recession will result operating procedures more efficient. Our banking sector is under stress due to slow economic activity resulted from dropped level of consumer spending.

 

Results from the last year’s monetary policy were fiasco- external debt jumped by US$ 14 Billion, reserves dropped by US$6 Billion, CPI was as high as 25% & devaluation of rupee against dollars was up to 33%, record high trade deficit with some reasonable slow down in GDP. Independent monetary policy is the key for bringing back our economic fate back on track.