Dr Atiq ur Rehman
TOTAL revenue generated by Government of Canada for her expenses during 2019 was CA$334 billion. In 2020, responding to the pandemic, the Canadian government extended a fiscal stimulus of CA$ 354 billion for Canadians, heavier than the entire budget. This package includes $20 billion for health support system, $249 billion as direct aid to households and firms, $85 billion in liquidity support through tax deferrals and billions of dollars for other initiatives. In 2019, Italy had revenue of € 841 billion and the Italian government provided fiscal stimulus of over €500 billion and €700 billion as loan guarantees. Federal Government of Germany spent about 25% of her GDP in the Covid support programs and besides this, many local governments in Germany also released their own Covid support packages. The New Zealand generated revenue of NZ$ 109 billion in 2019 and spent NZ$ 62 billion in Covid relief. Thailand’s fiscal stimulus reaches to about 10% of their GDP, coupled with monetary easing by bringing the policy rate down to 0.5%. There are many governments spending more than 10% of their GDP and more than 50% of their annual budgets as fiscal stimulus.
Given a fall in revenues during pandemic, what allows these governments to extend such huge packages whose sizes sometimes exceed the entire budget? The answer to this mystery lies in monetary sovereignty of the nations. Beside other things, the sovereignty of a nation means the nation has monetary sovereignty, ie she can use her central bank to print money when needed. These governments use this authority in the time of need to support their people. If the governments can print money, what stops them to do so and why do they collect taxes? The answer is, monetary expansion needs very careful considerations. If the money supply in a country is expanded without expanding economic activity, it will only raise the price level. Zimbabwe once opted to print money for government expenditure and the inflation rose to such a high level that a billion Zimbabwean dollars could buy only a couple of eggs. Some other nations such as Bolivia and Brazil have experienced such hyperinflation in the recent past.
On one hand, the expansion in money supply is mentioned as responsible for hyperinflation reaching to several million percent per year; on the other hand, there are examples of the countries pumping trillions of dollars in their economies without any inflation. This seems paradoxical, but understanding this paradox is no difficult. An economy would face hyperinflation if she pumps the money into existing economic activity without expansion.
If an economy is producing 20 loafs of bread and doubles the money supply without increasing production, the price of each loaf will double. But if newly printed money is used to bake extra loafs of money, the monetary expansion would not be inflationary. Therefore, many countries have successfully used the tool of monetary expansion to expand their economic activity. In particular, in the wake of Global Financial Crisis of 2007-08, the United States and European Union used the monetary expansion successfully to come out of crisis. The monetary expansion has been the most commonly used tool during the pandemic Covid-19.
Responding to the pandemic, most of central banks reduced their policy rates by huge proportion. Federal Reserve, the central bank of US reduced the policy rate from 2.5% to 0.25%. The United Kingdom reduced policy rate from 0.7% to 0.1%. A reduction in the policy rate implies expansion in the money supply similar to the money printing, but this reduction in policy rate didn’t spark inflation in those countries. This is because the economies were about to observe recession due to Covid and the stimulus were aimed to bring the economic activity on the pre-Covid trajectory. Similarly, many governments pumped huge amount of money directly in their economies in the form of social protection packages. For example, the United Kingdom pledged to pay 80 percent of the earnings of self-employed workers and furloughed employees during the pandemic. However, despite this huge direct cash transfer program, the inflation during 2020 remained 0.77%.
The Government of Pakistan announced Covid-19 relief package of PKR 1200 billion, just 2.7% of the GDP. This announcement was over-stated because already existing social support programs such as BISP were counted in the package. However, this small allocation was not disbursed properly and after passing six months of current fiscal year, only 34% of this package could be utilized so far and the major share in this utilized amount comes from BISP spending. This means actual Covid-19 related spending is much smaller. This is one of the poorest fiscal responses to the Covid-19 in the world.
Under strict vigilance of IMF, the government has stopped borrowing from SBP which is equivalent to the surrender of monetary sovereignty. In this time of extreme need, the country is not able to utilize its central bank properly. Fear of inflation is presented as justification for no borrowing from SBP, and despite this, the country is experiencing inflation which is highest in the region. At this time, the government needs to adapt the policies of excessive spending instead of the austerity and needs to boost the economy by monetary and fiscal and monetary stimulus. The government doesn’t have scarcity as long as she holds monetary sovereignty, and she needs to exploit this authority to bring the citizens out of the recession sparked by Covid-19.
—The Director, Kashmir Institute of Economics, University of Azad Jammu and Kashmir.
