EDITORIAL: Prime Minister Imran Khan while responding to public queries stated that he is fully aware of the price hike in the country but urged patience during his hour-long interaction with the general public on telephone. Price hike, he further contended, was due to the rupee depreciation and dollar inflows would arrest price hike. It is important to note that economic theory is based on a set of assumptions, including the critical ceteris paribus (other things remaining the same) condition used to project the precise impact of a policy adjustment on key macroeconomic indicators. On 12 May 2019 when the staff-level agreement with the International Monetary Fund (IMF) was signed the government embarked on monetary and fiscal policies designed to contract the economy including: (i) 13.25 percent discount rate effective 20 July 2019 till March 2020; (ii) a rupee depreciation - from 140.87 to the dollar on 1 April 2019 to 161.7 to the dollar on 1 April 2020; and (iii) a tax target of 5.5 trillion rupees for 2019-20 from 4.1 trillion rupees realized during 2018-19. The precise outcome of these policies was projected by the IMF in its programme document uploaded on its website, and fully endorsed by the government in the budget documents notably Gross Domestic Product (GDP) would contract dramatically to 1.5 percent (against 3.3 percent the year before) and inflation would rise to 13 percent (against 7.2 percent the year before). In other words, these policies were designed to contract output significantly which in classic economic theory should contain inflation but in our case because of our peculiar circumstance it increased inflation because energy and fuel prices were significantly increased.
Higher targeted tax revenue was to be sourced to widening the tax net, which the government failed to achieve, thereby increasing reliance on non-tax revenue specifically State Bank of Pakistan (SBP) profits to contain the budget deficit, a highly inflationary policy, which nonetheless was an unsustainable 9 percent in 2019-20. What is also important to note is the fact that an attempt was made to increase reliance on easy to collect taxes - particularly on petroleum and petroleum products as well as on electricity - with direct negative implications on input costs as well as on households’ disposable income, a tendency exhibited by previous administrations. Given the low combined weightage of petroleum and electricity (around 6 percent in calculation of headline inflation), raising taxes on these items implies minimal impact on official inflation figures though their impact on disposable income is considerably much higher.
The pandemic exacerbated the GDP contraction to negative 0.4 percent while inflation which has witnessed a decline in other countries to between a maximum of 3 to 4 percent due to falling sales registered a high of 8 percent in Pakistan in recent months which, as per the latest data released by the Pakistan Bureau of Statistics, declined to 5.7 percent in January 2021 year on year due to a decline in the prices of perishables. Even if one takes the lower rate as a credible figure the public discontent is premised on the fact that prices are still rising at a rate that cannot be absorbed by a raise in incomes (public sector incomes were frozen in the current year while private sector employees are restrained in their demand for salaries to keep pace with inflation given the pervading uncertainty due to the pandemic).
Post-pandemic the government has reduced the severity of the contractionary policies though a 7 percent discount rate with headline inflation of 5.7 percent and core inflation of 5.4 percent cannot be defined as expansionary per se; the real effective exchange rate has not been calculated since October 2020 with provisional estimate of 97.1 for the month (against 121 in June 2017 when the then PML-N government was guilty of over-valuing the rupee to understate the country’s indebtedness) with many arguing that the rupee remains under-valued today – no doubt to encourage exports and discourage imports.
Exports have risen to 14.2 billion dollars against 13.5 billion dollars the year before though the Advisor to the Prime Minister on Commerce Razzak Dawood, as has become his usual practice, did not share the import figures which would have provided the macro picture. The SBP website notes July-December 2020 trade balance at negative 11.4 billion dollars against negative 9.7 billion dollars in the comparable period the year before. And the rise in foreign exchange reserves is partly sourced to a rise in remittances; however, both the donor agencies and SBP have projected lower remittances in months to come and hence the current account deficit is likely to widen in times to come making the massive sacrifice by the people last year due to the contractionary monetary and fiscal policies redundant.
The budget deficit has risen by 1.8 percent as per the Ministry of Finance July-December 2020 against 1.6 percent in the comparable period the year before, a highly inflationary policy, and while SBP reserves have risen from 11.7 billion dollars on 20 January 2020 to 13 billion dollars on 20 January 2021 yet based on the SBP accounting system these reserves do not include debt incurred through swap arrangements with countries and with foreign banks as well as IMF, leading many to conclude that the reserves are largely debt based.
And most disturbing of all is the government’s contention that while it raised FBR revenue by 5 percent it raised non-tax revenue (budgeted to decline this year in comparison to the year before) by 17.7 percent. Repeated requests for the source of this rise have not been shared with this newspaper by the Finance Ministry officials. The government needs to focus attention on the source of its foreign exchange reserves, its non-tax revenue, and with PSDP authorization declining by 16.8 percent July-November 2020 against the comparable period of the year before, a major source of GDP growth, evidence is piling up to indicate that the budgeted 2 percent growth rate and 6.5 percent inflation rate are unrealistic and unlikely to be met.
Copyright Business Recorder, 2021
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