Our monetary stimuli – Journal
What is a monetary stimulus? A fun but fitting way to figure it out is to remember Woody Allen’s Take the Money and Run movie. Interpret “take” as to borrow and “execute” as the management of government affairs. In the film, Woody Allen could neither fly nor run, despite or because of his antics. However, governments are almost always successful in managing their affairs. This is what a monetary stimulus is from the point of view of its initiator and the first receiver. There are also other stimulus receptors.
From the point of view of receivers, “helicopter money” better explains the concept. Imagine a helicopter dropping banknotes. What will the lucky recipients do? Whether they are poor or rich, they will put the bills in their pockets and most likely go on a spending spree. The poor receiver will buy much-needed essentials, while the rich receiver, who doesn’t really need the money, will likely save some or spend it on luxuries. Either way, this will lead to a multiplier “runoff” effect in a short-term consumer-driven impulse for the economy. In terms of human well-being, it is obvious that the poor receiver is better off picking up the notes dropped from the helicopter.
All of this has been known to economists and non-economists for a long time, whether or not they have seen Allen’s classic. For some reason, this process became known as “quantitative easing” (QE) after the 2008 global financial crisis and is considered one of the most important monetary policy tools to fight the recession. or depression. Some analysts believe that this tool did not exist before 2008, or if it did exist, it was hardly used. However, successive governments in Pakistan mastered the art of QE much earlier and practiced it regardless of whether there was a recession or a pandemic-like situation. We are used to giving stimuli according to the size of our economy.
Before moving on to measuring past stimuli, it would be good to address a few more of its obvious impacts. It increases the demand for domestic and imported goods, without increasing their supply in the short term. Both poor and rich contribute to this demand. A poor person would have money to buy not only milk and wheat (household products), but also edible oil and tea (imported products). The belly of the rich man is already filled with these commodities, so the demand for luxury food, clothing, travel and so on will arise; all of these products have a high content of imported ingredients. Since our households are already spendthrift, imports are the first to react positively to the stimulus, and are rising frantically. False national pride in keeping the rupee stronger and the dollar cheaper leads to the depletion of foreign exchange reserves and the rapid build-up of a balance of payments crisis. There is, of course, nothing new here for us. We all know the boom and bust cycles in our economy.
As soon as drug rehab begins, our bureaucrats and technocrats find ways to escape it, longing for the stimulus again.
While it was perfectly rational to stimulate our economy to avoid the recessive impact of the pandemic, our story of stimulus impact is still not over. With demand increasing rapidly and supply not responding or keeping pace, inflation begins to rise. Moreover, in our economy, even if there is no excess production capacity, there is still sufficient capacity to import at low prices (for the most part). Is there any surprise here for our self-defeating macroeconomic policies? Our country seems to be a classic example of the “moral hazard” of international lending. Shrewd politicians and their smarter bureaucrats know someone will come to their aid, so why not let yourself go “high” for a while, even without a recession, pandemic-induced or otherwise!
This situation is far more amusing and tragic, as the “rescuers” are portrayed as monsters seeking to destroy our economy with strict conditions to ensure that the patient does not get high. As soon as the rehab begins, our bureaucrats and technocrats begin to find ingenious ways, at the behest of those running the economy, to get out of rehab as soon as possible, longing for revival again. As the stimulus is also known as “liquidity”, the lines of the poet Zauq are aptly translated to warn against tasting wine, because once soaked it is impossible to get rid of the substance. Poor governments! How difficult it is to heed Zauq’s warnings and stay away from addiction.
One way to measure the stimulus is to take one-year net domestic borrowing as a proportion of GDP. The government rupee borrowing here includes stimuli of different strengths. Borrowing from the central bank is the most efficient, followed by borrowing from commercial banks and non-bank borrowing. Note that the easiest or cheapest stimulus is the most powerful and the most inflationary (borrowing from the State Bank). So, in terms of this measure, the highest stimulus since 1961 was 11.3% of GDP in FY19 before the start of the pandemic. Stimuli during Covid-19 were 6.1 pc and 6.3 pc of GDP in fiscal years 20 and 21. Stimuli have been above 3% of GDP for 46 of the 61 years since 1961. Stimuli have exceeded 6 % in fiscal years 1972, 1979, 1982-1983, 1985-1987, 1991-1993, 1999, 2008, 2011-2013, 2019-2021 (18 out of 61 years.) One of the main reasons stimuli have been contained in some years was that the economy was in rehab (e.g. 2014-2016.)
The majority of our excessive self-inflicted monetary stimuli in the past have resulted in balance of payments crises, forcing us to borrow from the IMF. We had engaged in 22 different IMF programs starting in 1958. So far, we have never succeeded in achieving lasting macroeconomic stability after one of these externally imposed rehabilitations for the simple reason that prudent macroeconomic management was hardly necessary. Are we not ready to take the difficult path of promoting savings and investment, paving the way for sustainable growth?
The writer is a former deputy governor of the State Bank of Pakistan.
Posted in Dawn, December 30, 2021