Dr Kamal Monnoo Never mix business with pleasure and politics with economics. It came as a big surprise when reading a recent release by the State Bank of Pakistan (SBP) that the government did not borrow anything from the central bank in the month of July 2011. Assuming that there is no point being proven here by the new acting Governor of the central bank and that SBP is too honourable an institution to issue any kind of an irresponsible statement, this feat is quite an achievement and perhaps an indication of a welcome realisation within the government that its obsession with debt needs to end. However, before we start celebrating we also need to assess the other part of the release, which elaborated that alternatively the governments borrowings with the commercial banks went up manifolds and, in fact, have never been higher Ironically, such a development in a way is even worse than if the government had just borrowed directly from the SBP and spared the commercial banks. Not only do the borrowings from the commercial lenders tend to be more expensive, but are also invariably structured over shorter periods, and not long term. This means the vicious cycle gets more vicious, as the government drops deeper into a cash flow crunch, with funds that cater mainly to short-term needs and almost ignore the nations long-term dreams. In fact, the damage that is caused by governments locking into the commercial financial institutions for their cash needs can be truly disastrous because of numerous negative factors that come into play by such a development: a) World has come to realise that all sovereign debt cannot automatically be assumed to be safe. The lessons from Europe and now also from the USA tell us that unchecked government appetites for debt not only take down a countrys economy, but also bring down its entire financial sector along with it. b) State debt that appears safe on the outside is, in fact, much less safe on the inside due to numerous imponderables that accompany governmental functions. Further, unlike a lending made out to the private sector, there is no guarantee that the money lent to the government is indeed being put to productive use and last but not least, in case of a default whom do you turn to for recovery or relief? c) With government eating up most of the available financial resources the private sector gets 'crowded out, thereby causing serious setbacks to the countrys prospects on growth, job creation and poverty alleviation. Then, of course, in Pakistan we have this extremely unhealthy trend of principal financial institutions being controlled by a few individuals/groups that simultaneously hold other diversified industrial and business portfolios. Such an ownership structure not only presents conflict of interest, but also makes the institutions very vulnerable to state or political abuse since the management more often than not is not in a position to refuse the government. India, on the other hand, has jealously guarded its control over its financial sector and has allowed a very fine mix of private sector space that, on the one hand, remains under check due to the dominance of state controlled financial institutions, yet, on the other, provides the necessary competition to keep all the players on their toes. Also, it gives the Indian government the leverage to stimulate the economy, as and when needed. The example of which we saw in 2008-09 when the State Bank of India (SBI) assumed a lead role in minimising the effects of the global financial meltdown on the Indian economy. Moreover, such a control provides the government with an effective tool to ensure that its growth remains equitable both geographically and socially. Another downside to an unhealthy reliance of the government (for its borrowing) on the commercial financial institutions is that it directly affects the autonomy of the state to undertake difficult decisions. For any sector the given is that when the going is good it builds reserves to help sustain itself during the rainy days. With the governments complete loss of leverage, these institutions over time tend to set their own course and priorities. While the government may be providing them key patronage during the steady period in hope that these private sector financial institution will come to its rescue in the hour of need, such thinking may be illusionary since the reality invariably comes to be quite different. Private entities are driven by their own compulsions and may not necessarily think it prudent to carry high reserves or not to spread themselves too thin. Their endeavour is to maximise their shareholders return or the management pay-outs. We just saw in Greece that though the Greek banks made tons of money when business was booming, they were found wanting when the economy collapsed. Likewise, in the USA the classical defence (for the irresponsible products in the real estate being directly linked to management bonuses) being put forward by the bailed-out financial institutions is that it was their job to maximise returns, which they did, whereas, it was the governments job to regulate, which it didnt? Greece, in its bailout II, is now jockeying to exercise more control over its banks by forcing them to partner in the countrys quest to overcome its debt. We can keep talking about lofty ideals or the skewed ground realities, but the primary duties of an apex bank are always three: (1) To safeguard the national currency, (2) To strike a balance between inflation and growth using the monetary tools at its disposal, and (3) To effectively regulate the financial institutions in the country to ensure that not only does the public savings remain safe, but also that they are in return used in public interest. The coming year is going to pose a lot of new challenges and opportunities. On the downside, the exports may not reach the levels we saw in 2010-11, the commodity prices are also likely to register a downward trend, which may signal an end to the continuous bull run in agriculture. However, on the upside, inflation may finally start to taper off as international prices go down and supply outpaces demand, reduced oil prices are likely to keep our import bill in check and mounting economic woes of the West may further turn on the tap of foreign remittance (by the NRP) for us. It will be up to us how to capitalise on these opportunities and whether or not our government proves up to the challenge - remember, borrowing per se is not bad, it is how one uses the borrowed funds that determines their usefulness or otherwise The writer is an entrepreneur and economic analyst. Email: kamalmannoo@hotmail.com