PIDE's advice

The Pakistan Institute of Development Economics (PIDE) is a premier economic research organisation of the country. As such, its advice on the state of the economy and its prognosis needs to be listened with a great deal of attention. At a pre-budget seminar held by the PIDE, the consensus as reflected in its "Budget Viewpoint" was that the economy was facing the gravest crisis and mired in stagflation.
Growth had plunged as the economy was hit hard by supply shocks caused by the devastating floods, energy shortages and the domestic security situation. Inflation also remained persistently high despite a tight monetary policy. The PIDE Vice Chancellor remarked that the monetary policy should be eased by reducing interest rates to allow the private sector to take off.
Former Principal Economic Advisor Sakib Sherani said that at this time inflation was the most sustained in the history of the country. He pleaded for taxing every section of the economy and opined that there were many options to open untapped areas including land utilisation. Another economist, Akmal Hussain was concerned that 74 percent population in Pakistan was faced with food insecurity and the continued economic recession would lead to severe stresses in the society that could challenge the survival of the state.
One of the exercises he had suggested was that Rs 91.5 billion could be saved only by rightsizing ministries with overlapping functions, while another Rs 140 billion could be saved by restructuring public sector corporations.
The PIDE also came up with a three-point strategy to steer the country out of stagflation. It recommended better macroeconomic management, prudent fiscal policy to revive the role of the government in development and a balanced monetary policy that could spark the revival of the private sector.
To improve macroeconomic management, the PIDE called for putting limits on monetisation of the fiscal deficit and strict adherence to the prescribed limits, and improving co-ordination between the centre and the provinces. It also proposed the resolution of the problem of circular debt upfront to mitigate the energy crisis in the short-run and the effective utilisation of development spending, both at the centre and provincial levels, to reduce poverty and revive economic growth.
We feel that the PIDE's analysis of the economy and its recommendations make ample sense but do not have a great chance to be seriously noted by the relevant authorities and put into practice or adopted as policy actions in the forthcoming budget. The reason for such a belief is that what has been asserted by the PIDE is not something new but mostly a rehashing of facts, which are already well-known and that too for a number of years through the various documents released by various agencies, including the IMF and the State Bank. There is also nothing fresh about the policy proposals.
However, it does not mean that the PIDE is somehow to be blamed or we do not agree with its set of recommendations. After all, if the disease is the same, every doctor would prescribe almost the same tests and medicines. Tactically, it would be good to remind the government as well as the opposition parties and the public at large about the problems of the economy and their likely solutions again and again.
Institutions like the State Bank, the IMF and the World Bank are at the forefront to raise the awareness level in this regard and constantly advocate the need for a change in policies to improve the economy. The added voice of the PIDE would definitely help in highlighting the issues in order to get the urgent attention of the parliamentarians and policymakers of the country. In fact, backed by the justifications provided by such a discourse, Finance Minister Dr Hafeez Sheikh, among other things, is now pushing hard to widen and deepen the tax net to raise more revenues and contain the fiscal deficit within reasonable limits.
The real test would, however, be getting these proposals approved from the parliament. It is still early to know the overall reaction of the public representatives at the time of the next budget, but one thing is certain. The tax resisting power of certain lobbies and interest groups is slowly but surely weakening under the weight of justifications persistently advanced by organisations like the PIDE.
However, it is hard to understand the emphasis on certain policy recommendations presented in the seminar. For instance, it may be a good idea to place limits on the monetisation of fiscal deficit and strict adherence to these limits but much more important in this context is to contain the overall budget deficit to a level which could be financed largely by non-inflationary sources.
It would be but natural for the government to resort to State Bank borrowings if the budget deficit continues to be high and other sources of finance are unable to bridge the gap. Also, emphasis on easing of interest rates at this juncture, in our view, is largely uncalled for.
Justification for such a policy shift could be found if the growth rate of the economy was adequate enough to absorb the impact of excess liquidity, likely to be created if interest rates were reduced or the saving rate of the economy was high to give an added impetus to its revival. On the other hand, an argument could be easily made that the inflation rate would have been much higher if the State Bank had yielded to the temptation of an easy monetary policy, which would have also been more popular in the business circles. Therefore, the State Bank may be advised to reduce the interest rates when there are indications of easing of inflationary pressures in the economy.