The balance goldilocks economy full#

The other big import items are automobiles and mobiles phones, which already face high tariffs and it is uncertain if any further increase is likely to significantly reduce their demand. However, with 80 percent of imports being industrial raw material inputs, fuel energy related products, and food, it is doubtful that tariffs will be increased on these items since that will only penalize consumers without achieving the policy objective. In turn, the government has announced it plans to increase tariffs on non-essential and luxury products to curb imports. The SBP has put the policy makers on notice about the economy possibly overheating and the dangers of procyclical stimulus boosting growth excessively such that it undermines the hard-won macro stability achieved over the previous three years. As an example of the fiscal stimulus that is contributing to the surge in imports and domestic inflation, it highlighted the disbursement of 44 percent of the total public sector development projects (PSDP) annual allocation of funds in just two and a half months.

The central bank warned that “any unforeseen slippages in the fiscal stance would further bolster domestic demand, imports and inflation” is likely to hasten possible tightening of monetary policy and raising of policy rates. The pace of this will be guided by the government’s fiscal stance and how successfully that contains growth to manageable levels.

While the central bank remained supportive of the recovery in growth in its monetary policy stance, it nevertheless flagged its intent to “keep inflation expectations anchored, and slow the growth in the current account deficit.” It signposted its willingness to gradually taper stimulus to achieve mildly positive real interest rates, which means the policy rate could be pushed up further. This was the first hike in interest rates after 18 months and underlined the need to curtail the disproportionally high import growth following “robust recovery in domestic demand.” The MPS indicated that there were vulnerabilities building up in the system as a result of the financial stimulus package provided over the last eighteen months to offset the adverse impact of the coronavirus outbreak, and these now needed to be unwound.Įven if consumers shift to buying locally assembled cars or mobile phones, the high proportion of components imported to assemble these items imply that the net impact on value of imports will be negligible. The State Bank of Pakistan (SBP) is alert to the limitations of growing faster than the BOP constrained growth rate, and this was reflected in its latest monetary policy statement (MPS) that announced the 25 basis points increase to 7.25 percent. Since poverty reduction and economic growth are highly correlated, policy makers need to try and maintain a sustainable growth rate, rather than press the pedal hard with policies that accelerate growth to levels that lead to the recurring pattern of boom and bust since the 1980’s. This is then followed by an extended period of fiscal and monetary policy-led suppressed growth. Periods of boom when GDP growth rates are higher than the sustainable growth rate tend to result in the BOP going out of whack, and foreign exchange reserves depleting to crisis level. Other economists have calculated the sustainable growth rate to be higher than this estimate, but few compute it to be greater than 5 percent. Using long-term estimates of import and export income elasticities, Pakistan’s BOP constrained growth rate has been estimated by Asian Development Bank (ADB) economists at 3.8 percent per annum. However, Pakistan’s medium-term growth rate is further inhibited by the need to avoid a balance-of-payments (BOP) crisis anytime the economy overheats.

The balance goldilocks economy full#

Finding just the right economic growth rate for the country through a combination of fiscal and monetary policies that sustainably improve standards of living as well as provide full employment while keeping inflation low is the Goldilocks challenge for all economies. In the children’s story “Goldilocks and the Three Bears,” Goldilocks tastes three different bowls and finds she prefers porridge that is neither too hot nor too cold, but has just the right temperature.