EDITORIAL: The governor State Bank of Pakistan (SBP), Jameel Ahmed, while addressing the flag hoisting ceremony on Independence Day, stated that global economic considerations have largely contributed to higher inflation in Pakistan.
Exogenous factors particularly disrupted global supply chain attributed to the pandemic onset in late 2019 and later in 2022 due to the Russia-Ukraine war, no doubt did play a role in the Consumer Price Index of 28.3 percent in July 2023 and the Sensitive Price Index for the week ending on 10 August at 30.82 percent.
However, Pakistan’s inflation is more than double the rates prevalent in regional countries as well as in countries beyond the region: India registered inflation of 7.44 percent for July, Bangladesh 9.69 percent, China 6.4 percent, the United States 3.2 percent, and the United Kingdom at 5 percent.
Even Sri Lanka that declared it was suspending all payments on sovereign debt effective 12 April 2022, the country with which comparisons have been drawn by the Shehbaz Sharif-led government, witnessed a rate of 6.3 percent.
This leads one to an obvious conclusion: endogenous factors played a much more significant role in domestic inflation relative to exogenous factors and it is high time that the economic team leaders – both at the Ministry of Finance and the SBP – admit and take responsibility for the current extremely high level of inflation in the country today.
It is patently evident that ruinous monetary policies by the SBP in determining the discount rate and controlling the rupee-dollar parity dating back to October last year and flawed fiscal policies by the government in general and the Ministry of Finance in particular have contributed massively to the current inflationary pressures.
It is time for the SBP to take responsibility for decisions that it fully supported at the time, tacitly or overtly. The SBP, after being granted full autonomy in January 2022, set a rupee-dollar parity which led to multiple exchange rates – a controlled interbank rate that could not be supported with the appallingly low foreign exchange reserves, an open market rate at which very limited dollars were available and a grey “premia” market at rates 20 to 30 rupees higher per dollar.
This led to not only a massive shrinking of remittance inflows through official channels and as a consequence in 2022-23 remittances declined by 4 billion dollars compared to 2021-22 that compelled the government to implement administrative measures to curtail imports, including imports of raw materials that had negative implications on output.
The policy rate was high but still not reflective of a positive rate of return which in turn was one of the prior conditions for approval of the Stand-By Arrangement (SBA) by the International Monetary Fund.
In terms of fiscal policies the need to rely less on indirect taxes whose incidence on the poor is greater than on the rich and more on direct tax collections based on the ability to pay principle are ever more urgently required.
Today, the reliance on indirect taxes is to the tune of about 60 percent and disturbingly the Federal Board of Revenue inaccurately credits withholding taxes in the sales tax mode, which should have been itemised as indirect taxes, under direct taxes, accounting for over 70 percent of all direct taxes collected.
This practice was criticised in the report by the Auditor General of Pakistan; however, FBR has yet to abandon this practice.
In addition, the steady rise in reliance on petroleum levy has raised prices across the broad but particularly in transport costs of goods and services – items which are major contributors to inflation today.
Under-performing utilities have taxes slapped on them to achieve full cost recovery, a factor that gains even more traction if the sector is reliant on borrowing from multilaterals/bilaterals.
There is an emergent need for tax reforms that are geared towards making the rich/influentials pay their due income taxes and this salutary objective cannot be reached by allowing non-filers legitimacy by charging them a higher rate than filers on purchase of goods and services. At the same time, successive governments, with no exceptions, have indulged in ever-rising budget deficits, a highly inflationary policy.
In the past four years budget deficits have been unsustainable – over 7 percent and these deficits are sourced to a massive rise in current expenditure, which is financed through bank borrowing.
A high policy rate, not supported by PML-N (Pakistan Muslim League-Nawaz) as it regards it as raising capital input costs for large-scale manufacturing sector, did not contain the government’s greed for over-spending through borrowing large sums from the domestic banking sector (with foreign loans unavailable due to sustained failure to reach a staff-level agreement on the ninth review due in November 2022) that crowded out private sector borrowing (by negative over 90 percent last year), with implications on the growth rate, but also was injected right back into the economy, thereby fuelling inflation still further.
What is completely inexplicable is the finance ministry’s decision to raise current expenditure by a whopping 53 percent from what was budgeted for 2022-23 in the current year and by 26.5 percent from the upward revised figure for last year in spite of the ongoing economic impasse that had brought the country onto the brink of default.
The caretakers must ensure the continuity of policies agreed under the SBA; however, ideally one would hope that they take some bold decisions by slashing current expenditure through voluntary sacrifices by the elite both within and outside the government and thereby raise some leverage with the Fund to phase out some harsh upfront conditions.
Copyright Business Recorder, 2023
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