EDITORIAL: Contractionary fiscal and monetary policies agreed with the International Monetary Fund (IMF) under the ongoing Stand-By Arrangement (SBA) as well as prompt implementation of agreed administrative measures including raising the prices of utilities to ensure full cost recovery and fuel (to meet the 869 billion rupees budgeted petroleum levy target) on an almost weekly basis with an obvious negative fallout on inflation, the eighth caretaker prime minister Anwaarul Haq Kakar who took oath on the country’s Independence Day has yet to come up with a policy statement to combat some extremely disturbing outcomes of these policies.
The outcomes range from declining national output fuelling unemployment, rising poverty levels, plunging stocks and a rupee that has remained under pressure since 14 August.
Kakar was briefed on the state of the economy the day after he took oath and his subsequent observation was indistinguishable from the reported views held by all stakeholders - members of the outgoing government as well as the establishment: heavy reliance on enhancement of foreign investment, already pledged by friendly countries, under the Special Investment Facilitation Council (SIFC) staffed by civilian (federal and provincial) and military personnel.
The SBA documents envisage a decline in foreign direct investment (FDI) as a percentage of GDP in the current year to 0.2 (against 0.4 last year). Be that as it may, we sincerely hope that the inflows are in line with the expectations of the SIFC instead of the IMF.
However, a word of caution is in order: FDI pledges in the past have not materialised and in some instances where they have materialised their cost to the general public has been very high (example being the contractual agreements with the Independent Power Producers). Kakar also referred to poor performance of power and tax sectors, adding that the focus of the interim government would be on reforms.
The caretaker finance minister as well as the advisor to the prime minister on finance were sworn in on 17 August and it would not be out of place to expect that the economic team would soon share its views on how to resolve the immediate issues facing the general public. It is pertinent to point out that there have been media reports that the caretaker finance minister Dr Shamshad Akhtar has held two meetings.
One with power sector officials to ensure implementation of conditions agreed with the Fund, including timely alignment of tariffs with cost structures as per Nepra’s and Ogra’s formulae and implement reforms to reduce operational, generation and circular debt-related financial costs in line with the current power and emerging gas circular debt management plan to put tariffs on a downward trajectory – a laudable objective but unlikely to be attained within the next three to four years, given the scale and extent of the sector’s problems.
Interestingly though, the proposal under serious consideration by the Shehbaz Sharif-led government notably to finalise a plan to hand over poorly performing distribution companies (Discos) to provinces reportedly came under discussion.
And secondly, the minister visited the Federal Board of Revenue (FBR), which is directly under her administrative control, and directed that the tax to GDP ratio be raised, incidentally an IMF condition under the SBA as well as in previous 23 programmes, and to think out of the box solutions – such exhortations that have been made by previous finance ministers too but to no avail.
The projected GDP growth rate for the economy by the Fund in SBA documents is 2.5 percent (against the low base of negative 0.5 percent in 2022-23). This is to be attained by: (i) export growth of 9.9 percent (against negative 13.6 percent in the outgoing year), a rate that is being challenged by the five main export sectors, including the textile sector citing the ever-rising input costs as the major impediment.
A 19.9 percent rise in imports against negative 25.2 percent last year that would generate higher FBR collections; however, one can only hope that this rise would be largely raw material imports that would increase national output; (ii) revised government consumption for last year was nearly 16 percent higher than what was budgeted for the year and a further 30 percent rise is budgeted in the current year’s budget (from the revised estimates of last year).
More disturbing is the fact that the bulk of this rise is in current expenditure, which is a highly inflationary policy as it is financed by debt, domestic and foreign; and (iii) investment, another major component of GDP, includes federal public sector development programme, which is budgeted to rise to 1.15 trillion rupees in the current year against 787 billion rupees in the revised estimates of last fiscal year while provinces have budgeted to allocate 2.7 trillion rupees in the current year against 2.38 trillion rupees last year. These outlays would be funded through borrowing and that would crowd out private sector borrowing for investment.
And finally, remittance growth is projected in the SBA documents at 21.6 percent against negative 13.5 percent last fiscal year – a rise that is unlikely, in spite of the SBA agreement to implement a market- based exchange rate as the illegal hawala/hundi system was restored subsequent to the disastrous Ishaq Dar policy to control the interbank rupee-dollar parity.
There is, therefore, a need for the prime minister to announce an economic plan that seeks to ease the economic impasse facing the country in general and the poor/vulnerable and the lower to middle income earners in particular and his silence while reiterating decisions by the previous government sound increasingly ominous to the general public.
Copyright Business Recorder, 2023
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