Government stoking the inflation fires

The State Bank of Pakistan (SBP) has released some rather disturbing statistical forecasts for the current year: a GDP growth rate of between 2 to 3 percent, an increase in domestic debt liabilities by 6.7 percent, a fiscal deficit of 6 to 6.5 percent (a rate considerably lower than the more credible 8.4 percent revealed by informed sources in the Ministry of Finance), and a rate of inflation of around 15 to 16 percent.
Economic theory dictates that a rise in domestic debt financed by printing money, a charge recently levelled by Governor State Bank while delivering his keynote speech on monetary policy, was the main contributor to the rise in inflationary pressures.
However, the responsibility of the country's economic managers in fuelling inflation through policy action or in some cases inaction that accounts for rising inflation does not end with heavy borrowing from the SBP in defiance of the commitment made to the International Monetary Fund (IMF) under the Stand-By Arrangement (SBA). The government also failed to adjust either the expenditure or the revenue side of the budget in an effort to keep the budget deficit within sustainable levels - another key factor behind rising inflation in this country.
Dr Hafeez Sheikh is at pains to lay the blame on external factors like the floods that devastated the homes and livelihood of around 14 million people, the ongoing global recession that compromised our consumer exports as well as the opposition by coalition partners and opposition members to raising the price of oil and products in alignment with the rise in the international price of oil as critical factors for his failure to achieve a sustainable deficit target.
He is quiet on his own shortcomings in selling some revenue generating proposals. These include what was agreed with the IMF in November 2008, namely to impose an across-the-board VAT with minimal exemptions and his own two-bit's worth which was part of the finance bill tabled last year but never put to the vote envisaging a one-time income tax on those already over-taxed, the urban professional class, to finance the flood victims.
With respect to expenditure, the Finance Minister has, like his predecessors who did not possess comparable academic credentials, opted to slash development expenditure by over 50 percent, an expenditure item that fuels employment and has expressed an inability to slash current expenditure as around 66 percent of that is earmarked for interest and principal debt repayments as well as defence expenditure - items that are not within the purview of any government to reduce.
Critics, however, rightly maintain that the demand by PML-N to generate revenue through curtailing corruption and reducing bailout packages for inefficiently run corruption-ridden state-owned entities (SOEs) is not doable in five months that are remaining in the current year.
However, the government can and must change the heads of SOEs who are suspect and establish an independent body to appoint the chairmen/managing directors of SOEs and autonomous organisations. Or in other words, a start can be made in this regard. Be that as it may, a rise in budget deficit is expected to further fuel inflation and the higher Finance Ministry deficit forecast would fuel inflation above the 15 percent forecast by the SBP. But this is not the end of the government's contribution to rising inflation.
Subsidies on essentials, like wheat for example, have fuelled inflation domestically as smuggling through our porous eastern and western borders has led to the ridiculous situation of our tax rupee subsidising these commodities in our neighbouring countries, while shortages develop here fuelling inflation.
Many have expressed concern that the recent agreement on Afghan Transit Trade opening Wahgah border for Afghan exports to India would open the floodgates of more smuggling and the price for that would again be paid by the Pakistani common man.
Two other factors have led to inflation in this country - factors that are within the purview of any government to control. First is the collective refusal by our parliamentarians to strengthen the Competition Commission of Pakistan (CCP) to ensure that collusion does not lead to windfall profits, (it is ironical that the PML-N is focused on setting up a commission to determine a fair price of sugar while it should have focused on CCP to determine whether there was collusion which is illegal and punishable under our laws) and the failure to control windfall profits in our markets due to what many in PPP maintain is the end of the magistracy system. Failure to act during the past three years has essentially implied that the government is guilty of rising inflationary pressures. It is hoped that some corrective measures are taken soon.