yaseen anwar : fiscal and monetary policies speech by mr yaseen anwar, governor of the state bank of pakistan, at national defence university, islamabad, 4 november 2013. * * * respected guests, esteemed servicemen, and students of this prestigious institution, assalam - o - alaikum! i am delighted to be invited to the national defence university to talk about fiscal and monetary policies in general and in the context of pakistan. it is a fact, not many students like economics as a subject. but it is also true that not many subjects impact our lives as does economics. it is therefore not surprising that everyone likes to jump into discussion on economic issues even if their knowledge ( on the subject ) is rudimentary. one just has to flip thru channels on tv to see the variety of views on the subject, which are not always correct or informed. over the years sbp through its various publications and seminars, has been trying to enhance the understanding of the general public on various economic issues. i would like to think that it is partly because of sbp ’ s efforts, that the general public today is much more aware of economic issues than they were, say ten years ago. i am sure you already have heard a great deal about monetary and fiscal policies, and there may be little i can add to enhance your knowledge on the subject. what i can do however, is to try to bridge the gap between theory and practice. in text books, monetary and fiscal policies appear simple enough and desired objectives can be achieved by manipulating policy instruments. the question arises : • why do countries find it so difficult to get their policy mix right? • why countries cannot strictly control the supply of money to keep inflation in check? • why do countries struggle to smooth out economic fluctuations? • why are countries ’ fiscal accounts always imbalanced? the reason is that policy goals often conflict with each other, and economic variables cannot be determined in isolation. therefore, while it is important to know about the policies individually it is equally if not more important to understand how these policies interact with each other. broadly speaking, monetary policy involves central banks ’ use of policy instruments to influence interest rates and money supply in order to keep overall prices and financial markets stable. the policy could be “ expansionary ”, to stimulate economic growth or “ contractionary ”, to check the rising price levels ( inflation ). fiscal policy, on the other hand, is government ’ s management of its revenues and expenditures

such as interest rates, central banks around the world used unconventional measures such as quantitative easing ( qe ) to provide cheap liquidity in the market to stem erosion of investor confidence. thus, fiscal and monetary policies are no longer restricted to their traditional roles. in pakistan, however, the situation under which the fiscal and monetary policies have to operate is fundamentally different and far more complicated. first, we have not had sustained periods of political and economic stability in recent history. we have been at the forefront of the war on terror for over a decade now. besides damage to life and property, this participation has resulted in a huge strain on our country ’ s meager resources, which has not been fully compensated for. second, the power sector crisis has crippled a significant part of economic activity. inappropriate policies, which offered guaranteed equity returns and disregarded what is an appropriate fuel mix for the country, 1 price distortions, expensive and poorly targeted subsidies, inefficiencies in the energy supply and distribution, and low recoveries have resulted in a crisis gripping the power sector. persistent energy shortages have resulted in a decline in the productive capacity of our industrial sector which has lead to an increase in unemployment. third, lack of diversification and innovation in the economy combined with scarcity of entrepreneurial talent has made us depend on a few sectors for economic growth and export earnings, such as textiles. fourth, instead of exploring and developing abundant natural resources in the country, we import a number of essential goods like crude oil, that are, to a large extent, price inelastic ( fyi every $ 5 reduction in price saver us $ 750 million in fx for the year ). fifth, from general public to higher echelons there is a general culture of tax evasion which limits the ability of the government to raise an appropriate amount of revenues. sixth, a sizeable chunk of our munir, kamal a. and khalid, salman. 2012. “ pakistan ’ s power crisis : how did we get here? ” the lahore journal of economics 17 : 73 – 82. bis central bankers ’ speeches economy is in the informal sector which remains undocumented and therefore beyond the tax net. seventh, public sector enterprises instead of being a source of revenue for the government eat up scarce resources every year. finally, we have had the misfortune of sufferings due to natural disasters i. e. floods and earthquakes in the recent past. all these endogenous and exogenous factors