Our monetary stimuli

By Riaz Riazuddin
Published in DAWN on December 30, 2021

WHAT is a monetary stimulus? An amusing but apt way to understand it is to recall Woody Allen’s movie Take the Money and Run. Interpret ‘take’ as borrow and ‘run’ as running the affairs of government. In the movie, Woody Allen could neither rob nor run, despite or because of his antics. Govern­m­ents, however, are almost always ‘successful’ in run­ning their affairs. This is what a monetary stimulus is from the perspective of its initiator and the first receiver. There are other receivers of the stimulus too.

From the receivers’ perspective, ‘helicopter money’ explains the concept better. Imagine a helicopter dropping currency notes. What will the lucky receivers do? Whether poor or rich, they will put the notes in their pocket and most likely go on a spending spree. The poor receiver will purchase much-needed essentials, while the rich receiver, who doesn’t really need the money, is likely to save a part of it or spend it on luxury items. In both cases, it will lead to a ‘trickle down’, multiplier effect in a consumption-led short-term boost to the economy. In human welfare terms, it is obvious that it is better if the poor receiver collects the notes dropped from the helicopter.

All this is known to economists and non-economists for long, irrespective of whether or not they have seen Allen’s classic. For some reason, this process came to be known as ‘quantitative easing’ (QE) after the global financial crisis of 2008 and is regarded as one of the most important tools of monetary policy to fight recession or depression. Some analysts believe this tool did not exist prior to 2008, or if it did it was hardly used. Successive governments in Pakistan, however, mastered the art of QE much earlier, and practised it irrespective of whether there was a recession or a pandemic-like situation. We have a history of giving stimuli in relation to the size of our economy.

Before moving on to measuring past stimuli, it would be good to touch upon a few more of its obvious impacts. It raises the demand for both domestic and imported goods, without increasing their supply in the short run. Both the poor and rich contribute to this demand. A poor person would have the money to buy not only much-needed milk and wheat (domestic goods), but also edible oil and tea (imported goods). The rich man’s belly is already fil­led with these goods, so the demand for luxury food items, clothes, travel and whatnot will arise; all these goods have a high content of imported in­­gredients. Since our households are already spendthrifts, imports are the first to positively respond to the stimulus, and rise with a frenzy. False national pride in keeping the rupee stronger and the dollar cheaper results in 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 are all familiar with the boom-and-bust cycles in our economy.

As soon as rehab starts, our bureaucrats and technocrats find ways to escape from it, longing fervently for the stimulus again.

While it was perfectly rational to provide a stimulus to our economy to ward off the recessionary impact of the pandemic, our stimulus-impact story is still not complete. With demand increasing fast and supply not responding or not keeping pace, inflation begins to rise. Also, in our economy even if there is no excess capacity for production, there is always ample capacity to import cheaply (for the most part). Is there any surprise here for our self-destructive macroeconomic policies? Our country seems to be a classic example of the ‘moral hazard’ of international lending. Astute politicians and their more astute bureaucrats know that someone will come to their rescue, so why not indulge in getting ‘high’ for a while even when there’s no recession, pandemic-induced or otherwise!

This situation is far more amusing and tragic, as the ‘rescuers’ are depicted as monsters out to destroy our economy with harsh conditionalities to ensure the patient does not get high. As soon as rehab starts, our bureaucrats and technocrats start to find ingenious ways, at the behest of those who run the economy, to get out of rehab as soon as possible, longing fervently for the stimulus again. As the stimulus is also known as ‘liquidity’, the lines of the poet Zauq are aptly translated to caution against tasting wine, for once imbibed there is no getting rid of the subst­a­­nce. Poor governments! How hard it is to follow Zauq’s words of caution and stay away from addiction.

One way to measure the stimulus is to take net domestic borrowing in a year as a proportion of GDP. The government rupee borrowing here includes stimuli of different potencies. Borrowing from the central bank is the most potent, followed by borrowing from commercial banks and non-bank borrowing. Note that the most effortless or cheapest stimulus is the most potent and inflationary (borrowing from the State Bank). So, in terms of this measure the highest stimulus since 1961 was 11.3 per cent of GDP in FY19 before the onset of the pandemic. Stimuli during Covid-19 were 6.1pc and 6.3pc of GDP in FY20 and FY21. Stimuli were greater than 3pc of GDP in 46 out of the 61 years since 1961. Stimulus exceeded 6pc during fiscal years 1972, 1979, 1982-1983, 1985-1987, 1991-1993, 1999, 2008, 2011-2013, 2019-2021 (18 out of 61 years.) One dominant reason that the stimuli were contained in some years was that the economy was in rehab (eg 2014-2016.)

A majority of our past self-inflicted excessive monetary stimuli resulted in balance-of-payments crises, forcing us to borrow from the IMF. We had committed to 22 different IMF programmes beginning in 1958. So far, we have never been successful in achieving sustained macro stability after any of these externally imposed rehabs for the simple reason that prudent macroeconomic management has hardly been self-imposed. Are we not willing to ascend the difficult path of promoting savings and investment, paving the way for sustainable growth?

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