EDITORIAL: 2021 will be remembered as the divisive year — in terms of the yawning political divide that exacerbated the economic disconnect between the government and the opposition in the aftermath of visible public discontent at rising inflation, and more recently gas shortages attributed to failure to import RLNG on time for the second year running, thereby strengthening the Opposition’s narrative of sustained poor governance. The government’s narrative that inflation is due to global recession has been weakened by three factors.
First, the agreement with the International Monetary Fund (IMF) under the 6 billion dollar July 2019 Extended Fund Facility Programme identifies time-bound administrative measures targeted to attain full cost recovery focused on passing on sector inefficiencies to consumers by raising prices of utilities (instead of implementing structural reforms with the objective of dealing with the sector inefficiencies, particularly gas and electricity), and petroleum levy with direct impact on the cost of transportation of people and goods, including perishables. This approach was reiterated in February 2021 in the second to fifth IMF review that led to the sudden exit of Dr Hafeez Sheikh — one of the two signatories to the programme, the other being Dr Reza Baqir, Governor State Bank of Pakistan — and the appointment of Shaukat Tarin in April 2021 as the finance minister.
There is now ample evidence that Tarin’s initial optimism that he could renegotiate the terms agreed with the IMF was misplaced, and the government’s support for the money bill envisaging the withdrawal of exemptions of over 330 billion rupees is proof as is the public admission that the government will raise the petroleum levy by 4 rupees per litre each month to push it to the maximum allowed of 30 rupees per litre.
Second, the continued erosion of the rupee vis-a-vis the dollar — from 152 rupees to the dollar in May 2021 to over 178 rupees to the dollar in the last week of the year, resulted in imported inflation contributing significantly to the general price level. Pakistan however benefited marginally through a raise in the price of its exports (by around 2 billion dollars) on account of rise in international prices of most commodities and items but lost heavily through its sustained reliance on imports.
The trade deficit for the first five months of 2021 is 20 billion dollars that compares extremely unfavourably with the 30 billion dollar at the time the Khan administration took oath in 2018. The discount rate at 9.75 percent today indicative of a reversal of the easing of the policy due to the pandemic which had made the cost of borrowing cheaper and fuelled growth was justified by the Monetary Policy Statement (MPS) as appropriate given the headline inflation increasing to 11.5 percent year on year, and core inflation in urban centres at 7.6 percent and rural 8.32 percent. In January 2021, the discount rate was 7 percent with the MPS projecting inaccurately that “inflation is still expected to fall within the previously announced range of 7-9 percent for FY21 and trend toward the 5-7 percent target range over the medium-term.”
And finally, a comparison of the rate of inflation with regional countries shows that Pakistan’s rate is double that of India and a good 2 to 3 percentage points higher than Sri Lanka and Bangladesh. A comparison with the West complaining of supply side issues being responsible for inflation also shows rates below ours – US 6.2 percent, EU 4.9 percent – but with their income levels much higher than in Pakistan their ability to absorb the price rise is greater.
The solution to what ails Pakistan’s economy, as per the Khan administration, is threefold: raising revenue, borrowing and lending at cheap/free rates to small and medium enterprises, poor farmers with no collateral required. Disturbingly, the focus continues to be raising indirect taxes whose incidence is greater on the poor than the rich (the controversial money bill envisages the withdrawal of sales tax exemptions by raising it on hundreds of items to the standard 17 percent — a tax that maybe appropriate in the West given their incomes and social security safety nets (payments) for the unemployed).
There is of course talk of widening the tax net but such talk has been ongoing since 2008 and one would have to wait and see if the government will succeed in implementing measures that are being opposed by several pressure groups. Secondly, external borrowing has risen from 95 billion dollars in August 2018 to over 127 billion dollars today — a rise that is not supported by the government’s narrative that it is borrowing to pay off past loans. And domestic debt has risen at a horrendous rate — from 16.5 trillion rupees in August 2018 to over 27 trillion rupees today.
And finally, the government’s focus on lending at cheap rates/nil interest rates with no collateral maybe an attempt to cut into the windfall profits of banks which have so far been lending to the government at rates even higher than the discount rate with no risk involved but the government should be aware of the fact that this is not a new scheme and in the past such schemes were hijacked by the rich and influential. Again time will tell if this scheme will be successful.
Pro-poor Ehsaas programme is widely regarded as well run; however, the limited fiscal space together with the high rate of inflation continues to erode the purchasing power of the package sooner than the government can announce its addition.
The government holds the lack of tax culture as the reason for the limited fiscal space; however, it needs to look at its own annual budgeted expenditure rise: It has raised current expenditure by about a trillion rupees this year, a rise that is simply untenable. The recipients of budgeted allocations, including subsidies given to influential pressure groups, must make a voluntary sacrifice to slash their allocations by half to strengthen the government’s hands in its negotiations with the Fund on the next review.
Copyright Business Recorder, 2021
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