EDITORIAL: Advisor to the Federal Finance Minister on Economic and Financial Revenue Khurram Shehzad stated that the cut in the policy rate helped the government save 1.3 trillion rupees and referred to positive economic indicators that include the significant decline in inflation - with little feel-good factor as private sector wages have remained constant for the past four to five years while inflation continues to rise partly due to administrative measures agreed with the International Monetary Fund (IMF) and partly due to the sustained rise in current expenditure - the strengthening of reserves to cover two and half months of imports (the standard minimum being three months), and strengthening of the current account (with import delays as well as the acknowledgement by authorities) that “shortening of the period for repatriation of export proceeds is appropriate given still fragile external conditions.”
The Monetary Policy Committee decisions on the policy rate linked to inflation are as follows: 20.5 percent on 10 June this year to 19.5 percent on 29 July, to 17.5 percent on 12 September to 15 percent on 4 November.
In other words, there has been a sizeable decline in the policy rate - 5.5 percent since the start of the current fiscal year on 1 July – and the major benefit is to the government, which has been crowding out private sector credit for the past four to five years.
Data released by the Ministry of Finance acknowledges that credit to the private sector 1 July to 11 October 2024 was negative 240.9 billion rupees while in the comparable period of 2023 the negativity was only 6.9 billion rupees more - at negative 247.8 billion rupees - even though the policy rate during the entire period under consideration was 22 percent.
In other words, the policy rate decline has reduced the debt servicing component of current expenditure; however, no information is available as to whether this decline has not been absorbed by other components of current expenditure, reflective of elite capture and failure to implement pension reforms, which would be concerning to the general public.
Be that as it may, what was baffling is that on the day Punjab’s land routes to all other provinces and the federal capital remained shut for the third consecutive day, and the failure of the federal government to stave off the entry of Pakistan Tehreek-e-Insaf activists into Islamabad after deploying around 35,000 law enforcement personnel, the country’s stock market, considered a barometer of market perceptions around the world, set a new high record.
And the rupee remained stable, which surprised no one as the rupee was one currency that remained stable even at a time when the dollar strengthened against all major currencies of the world the day Trump was declared victorious in the US presidential election.
It is also critical to note that during the recent visit of the IMF mission to the country Punjab macroeconomic data was hastily amended to show a surplus that put it on the path towards realising the 630 billion rupee surplus in the current year that was agreed with the Fund.
This not only raises the question as to the credibility of data but also whether the government has begun implementing structural reforms in any sector agreed with the IMF or whether it is relying on the same measures as those that were adopted by previous administrations? Disturbingly, the answer lies in the government failing to implement structural reforms in: (i) the energy sector where full cost recovery continues to imply ever-rising tariffs that account for a 20 to 22 percent reduction in demand that, in turn, has implied higher capacity payments and a rise in circular debt; (ii) tax measures which continue to rely heavily on indirect taxes, to the tune of 75 to 80 percent, whose incidence on the poor is greater than on the rich, with contingency measures agreed with the Fund in case of a shortfall consisting of higher indirect taxes; (iii) privatisation policy with the recent extremely embarrassing fiasco during the PIA bidding process; (iv) state-owned entities turn around focused on appointing new boards of directors, with such changes in the past doing little to improve the SOEs’ performance.
We would urge the government to seek voluntary sacrifice from the major recipients of current expenditure and at the same time begin implementing structural reforms in all sectors and refrain from passing on the onus of sectoral incompetence/poor performance onto the general public that, given 41 percent poverty levels in the country, can simply no longer afford to bear the burden.
Copyright Business Recorder, 2024
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