EDITORIAL: Prime Minister Imran Khan, unexpectedly, provided a relief package to the general public through a 10 rupee per litre reduction in the price of petroleum and products, a 5 rupee per unit cut in electricity tariff and 2,000 rupees additional cash disbursement for the Benazir Income Support Programme (BISP) beneficiaries — a package that is unquantified as these prices would remain applicable till the end of the current fiscal year (30 June 2022) while the actual international prices of fuel are not known though projections are that they are likely to rise further as the Russia-Ukraine conflict escalates with Russian President Vladimir Putin placing Russian nuclear forces on ‘special’ alert.
The package was unexpected for four reasons. First, the government pledged to the International Monetary Fund (IMF) in January this year to not only to pass on the rise in the international prices of fuel to the consumers but also to raise the petroleum levy by 4 rupees per liter till it reaches the maximum legally allowed limit of 30 rupees per litre — a measure estimated to reduce revenue by over 280 billion rupees at today’s fuel prices which Foreign Minister Shah Mahmood Qureshi stated would be adjusted by deferring projects that have yet to start as well as those with as yet low implementation.
However, the Public Sector Development Programme (PSDP), a key engine of growth, budgeted at an unrealistic 900 billion rupees was slashed by around 200 billion rupees and any further decline would imply an outlay of less than 500 billion rupees. In addition, the objective of achieving full-cost recovery in the poorly performing energy sector, as committed to the IMF, envisaged raising electricity base tariffs to meet the cost of inefficiencies and arrest and subsequently reverse the circular debt flow as well as pass on the fuel adjustment charges as and when fuel prices rise internationally.
As the Fund has shown absolutely no flexibility in phasing out the harsh upfront conditions, evident from the inordinate delay in the success of the sixth review, it is unlikely that the Fund will accept the Ukraine-Russia crisis as a mitigating factor in easing these conditions.
Second, an amnesty scheme for the industrial sector is in the works, the third since 2018 that acts as a disincentive to the honest taxpayers, a claim made not only repeatedly by the IMF but also by the Prime Minister before he took oath.
The number of amnesty schemes rivals almost the number of IMF programmes that Pakistan has taken and it must be borne in mind that none of the schemes has generated significant amount of foreign exchange. While it is true that amnesty schemes launched by other countries, including Malaysia, were highly successful; however, time will tell whether this latest scheme will give far-reaching dividends. Be that as it may, amnesty schemes are opposed by the IMF which may act as a drone strike with respect to the success of the seventh review that was scheduled for 4 March this year as well as by the Financial Action Task Force (FATF) which raises questions about a change in our status as a grey list country.
Third, no controls on foreign exchange movement may fuel capital flight which would have a commensurate impact on the rupee value but perhaps the Governor State Bank of Pakistan may be tempted to support the rupee. However, the support would be short-lived as it would quickly erode the reserves that are largely supported by debt.
In addition, this policy may provide fodder to countries working against Pakistan to pressurise the FATF to keep us at best on the grey list and at worst to place us on the black list — both decisions likely to compromise the country’s ability to borrow at reasonable rates and/or to attract foreign direct investment. And finally, the Prime Minister announced that raising the cash disbursement to the 5.7 billion BISP beneficiaries by 2,000 rupees or 11.4 billion rupees additional amount which again would further compromise the government’s capacity to fund it from budgeted domestic resources.
A rough estimate of this package would place an additional burden of around half a billion rupees more on the treasury compelling the government to borrow from the domestic market (domestic debt has already risen from 16.5 trillion rupees in 2018 to over 27 trillion rupees today) and foreign debt (from 95 billion dollars in 2018 to over 130 billion dollars today) with around 10 billion dollars acknowledged by the government in the parliamentary committee to have been used for budget support as opposed to payment for previous loans.
The Prime Minister began his speech by asking members of the opposition to give proposals to reduce prices of specific items but then proceeded to announce unsustainable expansionary monetary and fiscal policy measures, a common pre-election strategy, reminiscent of the policies announced before the 2008 elections which nonetheless did not lead to the electoral victory of the then sitting government. Those who contend that these measures would take away all the air from the Opposition’s no-confidence balloon as they are tantamount to a drone strike on their aspirations to cease power though, unfortunately, the strike is also on the country’s already fragile economy, have a valid argument. While this newspaper has always emphasized the need to support economic as opposed to political considerations, for which the need is now acute and would become even more so with implementation of these latest measures, yet ground realities have time and again indicated otherwise.
The Prime Minister cited many a foreign journal as proof positive that the economy was on the right path; however, he must be reminded that the then finance minister in the last PML-N government, Ishaq Dar, similarly cited favourable reports in foreign journals.
Be that as it may, a word of caution for the Prime Minister: expansionary policies are highly inflationary especially as growth maybe compromised due to the reduction in PSDP, and with borrowing costs projected to rise significantly with the IMF programme once again expected to stall — borrowing necessitated by a rise in outlay as per his recent package — the country would need non-traditional assistance, for example, payment in Pakistani rupees for oil imports, once available to India from Russia and adjusted with Indian exports, as well as outright grants from friendly countries which appears highly unlikely.
The best way forward is to slash current expenditure which the Khan administration raised from around 4.3 trillion rupees in 2018 to over 7.5 trillion rupees in the current year’s budget which would require sacrifices by recipient entities as well as reforms in the pension system.
Copyright Business Recorder, 2022
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