Need for greater discretionary economic policy

The International Monetary Fund (IMF) has pushed for pro-cyclical, austerity-based policies in its Stand-By Arrangement (SBA) programme with Pakistan in line with its usual bread-and-butter policy prescription generally meted out to programme countries, which the interim government should bring reversal to – and in favour of counter-cyclical, non-austerity-based policies – after successful negotiation with the IMF.

Yet for such negotiations to meaningfully play out, it is important that the government should indicate much greater discretionary economic policy options that allow for shrinking the twin deficit gap, on one hand, and put debt repayment on a much-needed more sustainable path, not to mention enhancing economic growth prospects, on the other.

For shrinking the fiscal deficit, the government will need to increase expenditure efficiency. Here, an important expenditure ticket-item is interest payments on debt, reducing which requires lowering policy rate.

Here, discretionary steps on the monetary policy side require reducing overboard monetary tightening through adopting greater initiatives on improving better governance of the markets which, in turn, will allow reducing a significant determinant of inflation in the shape of bottlenecks on supply-side that push-up cost-push inflation.

Some of the measures in this regard include revisiting price determination mechanism in real sector markets, for which a ‘price commission’ can be created, reducing the role of price distortion of sub-optimal practices in terms of hoarding, artificial supply shortages, over-profiteering, in particular by middlemen by bringing in both more efficient administrative measures, and by adopting ‘strategic price controls’ for important agriculture crops, especially those that feed into essential manufacturing.

Another important step required is to improve expenditure efficiency in reducing the contingent liabilities generated in the energy sector, and state-owned enterprises through greater administrative/regulatory discretionary economic policy steps, like bringing in more transparency, and greater technically equipped board of governors, along with introducing in a significant way better corporate management practices.

Here, it would make a lot of sense to do a relatively quick study of all government-owned entities with regard to which qualify for outright privatization, or which need to be opened up for ‘mixed-ownership’ enterprises.

Enhancing domestic resource mobilization requires once again better implementation by tax authorities of progressive-, and tax broadening regime as outlined in the Federal Budget 2023-24. This is important to significantly move away from over-board reliance on indirect taxes/levies, especially that appear in the oil and energy price determination.

Hence, fiscal space created through significantly reduced policy rate, will allow, on one hand, diminishing the need to keep high level of petroleum levy, which in turn will help reach relatively much lower oil prices; not to mention the second-round impact on inflation in the shape of lower cost-push inflation.

Reduced oil prices, and lower domestic debt burden will also allow government to have more discretion in terms of lowering currently very high burden of taxes in electricity bills composition currently.

Here, it needs to be indicated that through these discretionary policy measures, the economy will move from a currently pro-cyclical, austerity-based framework to a much-needed counter-cyclical, non-austerity economic basis with positive consequences for greater stimulus, and welfare spending.

Such policy measures would also lay a basis for moving towards greater primary deficit – which means more spend in terms of development expenditure, which in turn is important for reaching a much more resilient, green economy – and lower fiscal deficit; through achieving greater productive and allocative expenditure efficiencies.

A lower policy rate will also help reduce current account deficit at the back of lesser external debt repayments in addition to building up foreign exchange reserves through this channel, positively impacting domestic currency strength.

An appreciated Rupee against the US dollar will also help weaken the imported inflationary channel; in turn, putting into motion rounds of reducing inflation and lowering of policy rate, and so on and so forth.

Other discretionary policies with regard to bringing greater stability, and reducing speculation/over-profiteering in the foreign exchange market would involve putting place stricter controls/regulation, including government suspending private sector licenses, if need be, and provide all foreign currency through government designated outlets under SBP (State Bank of Pakistan) supervision.

Further improvement in the current account deficit may also come through discretionary steps adopted in terms of debt relief/re-profiling initiatives taken with multilateral and bilateral creditors.

With regard to multilateral debt relief/profiling it would make sense, for instance, to negotiate debt repayment schedule with the World Bank in the light of its recently announced debt pause clause for countries like Pakistan that have been affected by climate disasters. Also, negotiations should be held with the IMF as well to suspend or even cancel its surcharge policy – fees paid by debtor country of IMF loans on late repayments – in view of the highly climate change vulnerability of Pakistan. On the bilateral debt front, it would make sense to start re-profiling negotiations with China, given the country owes a significant proportion of debt to China in the overall debt owed by the country.

Copyright Business Recorder, 2023