A reality check shows a yawning gap between the relatively small audience (external more than internal as the country proactively seeks more external loans) that remains the focus of the ministry of finance and the rest of the populace comprising more than 95 percent of the people of this country – a contention backed by constant reference to four improved macroeconomic elements that, disturbingly, have yet to trickle down to the grassroots level.
The Monday past decision by the Monetary Policy Committee (MPC) to cut the policy rate by 100 basis points on 28 July this year to 19.5 percent and the same day the upgrade announcement by Fitch to CCC+ instead of the CCC, though retaining Pakistan within the category of very high credit risk, have been touted as achievements, as they certainly are. Two observations however are critical.
First, the reduction in the policy rate reflects a difference of 7.1 percent with the Consumer Price Index (CPI) for June and 5.5 percent with core inflation of 14 percent average of two months claimed in the Monetary Policy Statement (MPS) for the past two months (though the actual core inflation for May and June as cited by the Pakistan Bureau of Statistics is 12.3 and 12.2 respectively while July 2024 core inflation rate is even lower at 11.7 percent) – a differential that clearly speaks of a further reduction in the policy rate as stated by Finance Minister Muhammad Aurengzeb in his interaction with the Karachi Chamber of Commerce and Industry last Tuesday.
The one percent downgrade of the policy rate by SBP is however unlikely to offset what is termed in the MPS as “ad hoc decisions related to energy price adjustments” which are being taken with increasing regularity to meet the full cost recovery prior condition set by the International Monetary Fund (IMF) as the government is unable to deal with the systemic issues facing the power sector that include: (i) flawed contracts signed with the Independent Power Producers (pre-1994, 1994, 2002 and 2015) envisaging capacity payments, imported fuel and repatriation of profits.
In this context it is relevant to note that the Khan administration began to renegotiate IPP contracts successfully with the assistance of intelligence agencies but was unsuccessful in renegotiating contracts signed in 2015 by the Nawaz Sharif-led government; (ii) the country’s generation capacity is higher than demand which, coupled with the flawed policy of encouraging renewables/solar units, has implied ever rising tariffs as middle to rich consumers opted out of the national grid which, in turn, reduced demand and raised IPP capacity payment charges; and (iii) the decision to cut fuel imports by around 4 billion dollars last fiscal year against the year before to minimize the trade deficit and reduce pressure on the balance of payments are having negative repercussions on the quality of life and productive capacity.
Finance minister Aurangzeb during his last Sunday press conference emphasized that the country was not seeking restructuring but re-profiling of debt - an insistence that took account of the following note by Fitch under the head of factors that could, individually or collectively lead to negative rating action/downgrade: “renewed deterioration in external liquidity conditions that could result from delays in IMF programme reviews, or indications that the authorities are considering debt restructuring.”
The Fitch report notes that CCC rating is for long-term foreign currency Issuer Default Rating (IDR) scale as it does not assign outlook to sovereigns with a rating of CCC+ or below; adding that “Country Ceiling Model produced a starting point uplift of zero notches” for Pakistan – not as positive a news as is being touted by the government.
Second, inflation is on a downward trajectory. While it is easy to dismiss the claim that inflation is declining as its cumulative effect remains high - 29.2 percent July-May 2022-23 to 24.5 percent July-May 2023-24 - yet May 2023 CPI of 38 percent against May 2024 of 11.8 percent is a massive 69 percent lower.
And the July rate is lower still, at 11.1 percent. Independent economists are claiming the rate is understated by at least 3 to 5 percentage points (subsidized electricity/fuel/gas rates rather than the average was considered, subsidized essentials not always available at Utility Stores or of the quality required, and understating rents) that may partly explain why the general population is increasingly restive as there is a sustained shrinkage in their ability to access utilities and services.
But the critical element in there is no feel good factor for the common man as a steady rise in utility prices is projected.
A recently launched political grouping is proposing cutting out taxes on utilities, yet a better approach would be to end the policy of tariff equalization that no longer makes sense after the distribution companies were established which would release 500 billion rupees for investment in social sectors annually.
The third citation is the stock market upswing. The July 2024 Economic Update and Outlook notes that the upward trend in PSX began in September 2023 and continued to June 2024. This statistic often taken by the country’s economic managers as proof of sound economic policies is however limited to a small number of players who have the capacity to manipulate the market in return for lower taxes.
It is therefore not a coincidence that Pakistan’s stock market generates tax revenue of no more than 3 to 4 billion rupees and in contrast India’s stock market generates tax revenue of over 100 billion rupees.
And finally, the Large Scale Manufacturing sector registered a one percent growth last July-May 2024 compared to negative 9.6 percent in the comparable period of the year before.
One factor that led to an improvement in these four macroeconomic elements is the absence of Ishaq Dar from the finance ministry.
Dar was the finance minister from late September 2022 to August 2023 and his flawed policies led to the suspension of the ninth review of the 2019 Extended Fund Facility programme as well as loss of 4 billion-dollars remittance inflows; and the consequent low base in 2022-23 accounts for more favourable comparative data/graphs for last fiscal year. But this factor will be limited to the first quarter of 2023-24, and more needs to be done for further improvement of key indicators.
The incumbent finance minister has emphasized the country’s potential, like all his predecessors, as opposed to the ground realities with little if any change in policies, accompanied by the assertion that this time around challenging reforms would be implemented, though so far they have not.
Given the 41 percent poverty levels in this country, the average inflation of 24.5 percent July-May 2024 and the failure of the private sector to give a wage indexed to inflation the government should have opted for slashing its own expenditure instead of insisting on implementing past iniquitous policies: raising taxes including petroleum levy - measures that should have been deferred till next fiscal year which is why the threat of a looming winter of discontent is looming large on the horizon.
Copyright Business Recorder, 2024
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