The latest statistics released by the Federal Bureau of Statistics merely reconfirm the general perception that inflationary pressures have strengthened: Consumer Price Index soared to 15.68 percent in December 2010, the highest in 12 months. Wholesale Price Index peaked at 24.40 percent and the Sensitive Price Index was estimated at 21.65 percent.
The reason for soaring prices is by now well-known: the persistent failure of the government, led by 100-plus federal ministers and sundry advisors, to implement the reforms as agreed with the International Monetary Fund (IMF), which has led to difficulties in the implementation of the IMF programme, thereby delaying the release of the last two tranches (estimated at a little over 3 billion dollars) but also compromised the pledged assistance from bilaterals who had linked releases with performance as stipulated in the IMF programme. The question, which has raised its ugly head is, why has the government persistently failed to implement the necessary fiscal reforms?
First and foremost the blame has to be laid at the doorstep of the PPP-led government, which has allowed the economy to become hostage to its political compulsions defined narrowly in keeping the government in place. Examples of this abound and range from the recent decision to withdraw the price of oil and its products in line with the international price of oil, a reversal of decision expected to cost the exchequer around 30 billion rupees in lost revenue during the rest of the fiscal year, to presenting the Reformed General Sales Tax (RGST) to the parliament and then backing off, once opposition to the bill made its passage unlikely. Critics argue that the government did not need to go to the parliament and could have increased the ambit of the existing sales tax, in the value-added mode, through a Statutory Regulatory Order. While the government has directly and indirectly accused other parliamentary parties for the reversal of these decisions, yet a government has far greater responsibility in terms of the economy than members of the Opposition.
A major part of the blame must also rest with the government's economic team. While it was Shaukat Tarin who actually signed on the dotted line accepting the rather challenging IMF conditions, especially with respect to the controversial VAT renamed RGST later, yet his academic credentials are not as strong as those of his successor Hafeez Sheikh - credentials that may have allowed him to understand that increasing the ambit of sales tax levied in the value-added mode during a recession would automatically lead to a decline in collections from the sales tax. Tarin's supporters argue that in 2008, when the IMF Stand-By Arrangement was approved, the country was not in such a deep recession and it was the first year of the electricity crisis with investors still optimistic about the future. They additionally point out that the IMF, with its team of economists, has continued to insist on RGST implementation, therefore there must be some irrefutable economic rationale behind it. One would have to disagree and point out that in this instance, the IMF team appears not to be cognisant of local conditions.
The RGST remains difficult to implement as it is opposed by those operating within the large parallel illegal economy and its success is premised on an efficiently run, seamless refund system which is simply not in place in this country. However Tarin, with his haughty temperament and abrasive demeanour, was a bully according to his cabinet colleagues who refused to release funds to the ministries, angering many a cabinet colleague. What he would be long remembered for is his insistence that third party audit be carried out on the controversial rental power projects (RPPs), the first ever decision of its kind in this country.
Hafeez Sheikh does have the economic credentials, though at times he appears to lack the local knowledge necessary to challenge some of the IMF proposals, but most disturbingly from our perspective, he is simply not a bully. He was reportedly unable to convince (prevent) the Prime Minister not to raise the salaries of the bureaucrats by 50 percent this year, a rise that has severely compromised the budget deficit target. In addition, he is also accused of having failed to sell the RGST to the coalition partners, a task made difficult when the members of his own party in the cabinet, of which he himself is an integral part, did not support him either. He was also unable to convince the members of the parliament that the rise in the price of oil and its products was critical in meeting the deficit targets and not doing so would dearly cost the people in times to come; much more than the rise in POL prices. This certainly would have eased IMF and US concerns on that count.
We have consistently argued that the terms of reference of a Finance Minister must include a political heavyweight with the capacity to say no to unjustified demands of his cabinet colleagues, including the Prime Minister, in the national economic interest; failing this, the Finance Minister needs to be a bully, who does not hesitate to go to the media if he strongly believes that his sound economic advice is being overruled at the altar of short-term political gain or expediency - an advice based on local knowledge and long -term interests of the people of this country. It is ironic that not possessing an abrasive temperament and haughty demeanour is to be characterised as a shortcoming in Hafeez Shaikh, because the frailty of our economic health does require of the finance minister to confront his cabinet colleagues and the opposition in the public domain and present his case in the court of the people. He is an astute qualified economist who has worked in multinational institutions, but he is hamstrung in utilising his qualifications and work experience to their potential to develop an economic strategy to confront the tough challenges that beset the economy. More so, because the government is still engaged in fire-fighting and profligacy, while playing to the gallery almost three years after it took power.
It is critical for all major political parties to agree on an economic strategy that would put the economy on a path of reform - a strategy that would not be derailed even if the government falls tomorrow. Leadership and political will is required of the political players in the parliament to bring all the disparate interests together.
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