Monetary and Fiscal Coordination Board for tightening fiscal policies

ISLAMABAD: At a time when government’s borrowing from State Bank of Pakistan (SBP) recorded a whopping surge to the tune of Rs3.7 trillion in first six and a half months period, the Monetary and Fiscal Coordination Board on Tuesday agreed upon the requirement of further tightening of fiscal policies in order to achieve the stability on economic front.

The PTI led government has jacked up the budget deficit target to 5.6 percent of GDP against earlier envisaged target of 5.1 percent of GDP for the current fiscal year so plan for fiscal consolidation was presented before the monetary and fiscal coordination board meeting with the need to achieve the FBR target of Rs4398 billion and non-tax revenue target especially on front of Gas Infrastructure Development Cess (GIDC), SBP profits and dividends. “The revenue surplus from the provinces and controlling expenditures is also part of fiscal consolidation plan,” said the official sources.

However, the independent economists argued that on one side the government was doling out incentive package at the cost of negative revenue impact of Rs6.8 billion through finance supplementary (second amendment) bill 2019 few days back and now they are talking about the requirement of tightening of fiscal policies it shows that the government is giving confusing signaling.

The borrowing from the SBP peaked to Rs3.77 trillion in first six months and 17 days till January 18, 2019 under PTI led regime against Rs870 billion got by the previous PML-N led regime in the same period in last financial year indicating that the borrowing from the central bank ballooned by more than four times. The Ministry of Finance issued statement to the media at 10:45 pm on Tuesday night and stated that the meeting of Monetary and Fiscal Policies Coordination Board was held here on Tuesday. The meeting was chaired by Finance Minister, Mr Asad Umar.

The meeting reviewed the fiscal and monetary policies besides having discussion on the external sector. The on-going adjustment plan for fiscal consolidation was presented to the Board. While reviewing the fiscal policy, the Board observed that there is further scope for tightening of the fiscal stance. The corrective measures taken by the government, both on the fiscal and quasi fiscal deficit were discussed.

The meeting observed that fiscal consolidation is a key element of the adjustment plan, and necessary for ensuing macroeconomic stability. The Board emphasized ensuring that revenue targets both on tax and non-tax side are met and expenditure controls continue to remain well in place. The key economic variables for the first half of FY 19 were deliberated in detail. The direction of external trade data is encouraging and points to the fact that fiscal and monetary tightening are having an impact on correcting the imbalances. The growth in remittances is also encouraging.

The meeting appreciated the fact that there was substantial participation in the last auction of PIBs. The meeting observed that real interest rates are positive and would help manage aggregate demand and reduce the output gap. On the monetary front, SBP reported that M2 in FY 19 is growing at higher pace while NFA has contracted. Turning to private sector credit, its growth momentum continued and is explained by increased input prices, the continuation of the investment cycle and ample liquidity with banks. Moreover, analysis shows that subsidized and non-subsidized credit to export-orientated sector has increased.