Is the persistently high rate of inflation, particularly the Sensitive Price Index (SPI) which constitutes 51 essential items and therefore relates to the poor and the vulnerable more than the rich, outweighing all other concerns in the Khan administration's economic narrative?
In the week ending 26 August 2021 SPI rose by 0.22 percent over the previous week while the year on year trend indicated an increase of 12.67 percent. And for January-June 2021 (second half of last fiscal year) the SPI rose by a whopping 16.13 percent.
Consumer Price Index (CPI) consisting of 356 items was as high as 7.2 percent in 2018-19, 12 percent in 2019-20, 9 percent in 2020-21, and is projected at 8.2 percent in the current year - rates which compare extremely unfavourably with the 4.56 percent in 2017-18.
Inflation thus continues to generate general public outcry prompting Imran Khan to publicly acknowledge that inflation is a major issue though he has yet to take responsibility for his administration's economic policies contribution to a general price rise - policies that range from an eroding rupee, a 7 percent discount rate that is the highest in the region and a rise in the reliance on petroleum levy though during the first two months of the current year the levy was massively adjusted downward to stay the expected public protest. The Prime Minister together with his economic team leaders continues to blame mafias for the general price rise, defined as colluders who manipulate supply and include not only industrialists/producers but also aarthis operating in the farm sector.
The general perception is that Dr Hafeez Sheikh was summarily dismissed on 29 March 2021 for accepting extremely harsh International Monetary Fund (IMF) conditions which showed lack of empathy with the general public through upping the utility rates that disrupted the kitchen budget of the poor and the lower middle income earners as well as raised input costs thereby stifling economic activity; and the over ambitious tax targets declared unrealistic for the past three years.
Fund conditions implemented by the State Bank of Pakistan pre-Covid19 included a discount rate of 13.25 percent that further nipped economic activity and massive rupee erosion even though Miftah Ismail and his successor Asad Umer had taken measures to allow the rupee to slide down close to its market value. And to add insult to injury short-term government debt was transformed into long term which at 13.25 percent (effective July 2019 to March 2020) contributed heavily to today's high debt servicing costs.
The appointment of Shaukat Tarin - a man who negotiated an IMF programme in 2008 with markedly less stringent conditions and insisted on third party audit of the rental power projects - was hailed as a man who could turn an un-empathetic IMF programme (which had perhaps not alienated Imran Khan's diehard supporters but had certainly angered a large number who voted for him in 2018 and whose support would be critical to win the next elections) into a more empathetic one. And it is in this context that Tarin hit the ground running by not only legitimately criticizing the monetary policies in 2019-20 (pre-Covid19) but also the staff level agreement on the second to fifth review with the IMF in February 2021 that included five key elements.
First, higher utility charges specifically electricity. Tarin's capacity to keep the tariff at the same rate however is limited to keeping the base rate constant as fuel adjustment charges and quarterly adjustments would continue to rise and indeed have since his appointment. Energy sector inefficiency has been sustained during the three years of the present government reflected by the rise in circular debt to 2.6 trillion rupees against 1.2 trillion rupees it inherited. However the government has claimed a decline in the flow (not the stock) of circular debt with critics pointing out that the flow has declined due to: (i) the agreement with the Fund to absorb part of the circular debt in the budget; (ii) the persistent rise in tariffs; (iii) the failure of the government to provide the subsidies it pledges; for example, in the current year, the government has pledged only 330 billion rupees while the demand of the power sector was 550 billion rupees; and (iv) the deal with the Independent Power Producers (IPPs) though its implementation with those established under the 2002 power policy remains pending due to National Accountability Bureau investigation though reports indicate that the agreed payment may be cleared in the current week as the Implementation Committee has cleared it. However, most importantly there is no deal with those established under the China Pakistan Economic Corridor umbrella.
Second, tax revenue target of 5.9 trillion rupees for 2021-22 - a target retained in the budget for the current year that envisages a rise of around 1.2 trillion rupees from the 4.7 trillion rupee tax revenue generated in 2020-21. FBR data however suggests that 62 percent of the additional one trillion rupees would be generated from the projected GDP growth of 5.02 percent and inflation of 8.2 percent while enforcement measures would generate around 242 billion rupees. The newly- appointed Chairman of FBR is gung-ho about the implementation of the enforcement measures however the two envisaged measures in this regard remain unimplemented to date: (i) third party audit - a boon for any private sector chartered accountant firm though the list of approved firms has yet to be released: and (ii) an ordinance that would allow sharing of data with Nadra however it is reportedly still being vetted by the Law Ministry.
Third, pro-poor initiatives particularly with respect to cheaper credit to the poor as part of the bottoms-up approach that Tarin, as a long time banker, is considered to have the ability to achieve; needless to add commercial banks would be reluctant to extend small loans not backed by collateral, unless severe penalties are imposed, though Tarin stated that if losses exceed 10 percent the loan will be suspended - a reasonable stipulation however this may require manpower that would add considerably to the cost of administering these loans.
The ambitious Kamyaab Pakistan programme (scheduled to be launched by end of this year as per the Prime Minister during the three-year achievement ceremony) together with all the other debit cards issued or to be issued by this government at the taxpayers' expense (BISP, farmers card, Sehat Sahulat Card backed by a state owned insurance company that has been removed from the privatization list) may show the very commendable intent of the Prime Minister but for a country experiencing unsustainable deficits for the past three years, double digit SPI and desirous of success in the stalled sixth review talks with the IMF this may turn from an icing on the cake to the last straw that breaks the camel's back.
And finally, pro-growth policies that militate against contractionary monetary policies - read the discount rate to remain unchanged at 7 percent supported cleverly this time around by the August CPI of 8.7 percent (to which inexplicably the discount rate was linked during the first nine months of the IMF programme) and core inflation of 6.3 percent (to which the rate was linked previously and perhaps since).
Supporting fiscal policies include lower charges for export industries as well as lower applicable taxes that in contrast to the pro-poor policies may be labeled as pro-rich which, in turn, have been implemented by many a previous administration but there is no empirical evidence linking their actual impact on increasing exports/productivity. In addition, the trickle-down theory is being challenged globally by economists as well as politicians.
To conclude, there are two important ingredients missing in the Shaukat Train strategy.
First of course is his focus on controlling inflation mainly through administrative measures and subsidies which the government can ill afford. Instead the government must keep a check on the budget deficit, reduce the money supply in circulation, and intervene in the foreign exchange market as disorderly market conditions prevail subsequent to the complete cessation of dollars from across the Afghan border.
And secondly, a lack of focus on current expenditure curtailment continues. This requires massive reforms in the pension system, including making employee contribution compulsory, and massive sacrifice from all government entities including civilian administration expenses, state owned entities, and the defense forces. In 2017-18 total current expenditure (revised estimates) was 4.298 trillion rupees against 7.523 trillion rupees in the current year - a rise of 75 percent in three years. Last year salaries of civilian/military personnel were not raised, a decision that could not be repeated this year due to political considerations, however the decline in current expenditure to 6.349 trillion rupees against 7.37 trillion rupees in 2019-20 is sourced to the G-7 debt relief initiative for developing countries not to any curtailment of current expenditure.
Copyright Business Recorder, 2021
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