Controlling inflation, financing deficits — II

Moreover, the government should even think of immediately quitting the IMF programme. If the Fund does not appreciate the fact that the country’s economy is needing primarily enhanced SDR allocation, and following a counter-cyclical/non-austerity policy prescription.

Moreover, the government should also indicate IMF’s recent relaxation for Kenya of allowing it to provide fuel-related subsidy. A recent article ‘IMF drops tough stance on Kenya’s fuel subsidy’ indicated in this regard: ‘IMF staff and the Kenyan authorities reached a staff-level agreement on economic policies to conclude the third review of the programme late last month.

“We have a common understanding (with the IMF). They would have preferred we left it (fuel prices) to the forces of the market but we have convinced them it is not possible,” Mr [Ukur] Yatani [Kenya’s Treasury Cabinet Secretary] said on the sidelines of the launch of the latest Economic Survey. “We have a duty to our people. When the IMF engagement is productive we take it, when it is going to impact negatively on us we are cautious about it.”’

Also, the government should not feel insecure that not being in the IMF programme would mean that other multilateral/bilateral lenders will stop financing development projects and possible budget support.

Since multilaterals have investments in development programmes, and a long-established relationship as well (like IMF), it is unlikely they will not continue with these, and not provide any level of budget support to Pakistan in view of extremely difficult situation of fiscal deficits.

Controlling inflation and financing deficits — I

In a highly unlikely case that lenders stop funding, even then the cost of neoliberal IMF programme is too high in terms of both direct economic outcomes, and indirect consequences in the shape of political stability to not go the way of the other option (as indicated in this article, and others) than remain in IMF programme.

Thus, the cost of obtaining a few billion dollars, and if they were a lot more, is too high both in terms of insignificant financing in the context of overall financing needs, and also because it does not allow putting the country on strong and economic footing. Moreover, leaving the IMF programme does not mean that lenders will not have an independent insight into Pakistan. The country will remain under a detailed IMF surveillance with regard to economy through Article IV consultations and reporting as a member of IMF.

On the institutional reform side, and taking certain governance-related steps, the government should work towards introducing ‘hybrid markets’, whereby rather than leaving prices and profit margins to market forces alone, in both agricultural and retail markets, and in ensuring that price lists are adhered to some sort of well-designed government hierarchy should be injected into markets.

Here, all the markets, as innovative steps, should come under some designated and created ‘market districts’, whereby all agricultural and retail markets are divided into districts/areas, surveillance system put in place in terms of control price lists, and implementation is improved drastically by government, by creating a whole new ‘Price Control and Surveillance Service (PCSS)’ at the federal and provincial levels. Moreover, Competition Commission of Pakistan (CCP) is more empowered for checking collusive practices.

Here, to provide more focused, technical support to government for price rationalization/controls in each market district, a ‘Price Rationalization and Control Commission (PRCC)’ is created at the federal and provincial levels; it must be assisted by the government, Competition Commission of Pakistan and the proposed PCSS.

PRCC is tasked, among possibly assigning additional duties as well, to make a list of essential commodities, analyses the current price determination mechanism, capture of data with regard to supply and demand, along with mechanism of profits, and rationalizes these with regard to correctness and justification. Moreover, it does this for both the agricultural and retail markets.

A guiding principle for PRCC should be the ‘dual-track system’, as successfully adopted by China which, among other related aspects, includes a pricing mechanism, and not to follow the principle of ‘shock therapy’ of fast and market fundamentalism-based price liberalization, as advocated by the IMF and in an overall tradition of neoliberal economics, which like Russia and many other countries, Pakistan has been practicing but to its disadvantage in terms of controlling inflation and in putting growth on a sustained path.

In this regard, Pakistan should also look to seek technical assistance of China in implementing this system on an urgent basis in view of a difficult inflation situation at hand.

In her book ‘How China escaped shock therapy: the market reform debate’, published last year, Isabella M. Weber indicated about dual-track system that it ‘…is not simply a price theory, but rather a process of market creation and regulation through state participation. …In contrast, big bang price liberalization under shock therapy caused a disorganization of existing production links without replacing them with market relations.’

Moreover, as an important step in controlling inflation, especially when speculative activity is also quite high, the government should flood markets with those commodities where supply is restricted purely to supply constraints created purely by the pandemic, and where hoarding/speculative practices are also in play.

Here, the government should also seek detailed implementation strategy from China, which successfully adopted this policy with regard to an implementation plan in terms of creating a network of warehouses, and procurement plans/strategies to overall build-up stocks of those essential commodities.

Furthermore, in the agricultural sector in particular, the role of middle-man needs to be drastically reduced – which is an important determinant of inflation — to significantly reduce the role of unjustified built-up in prices during movement from farm to agricultural markets, and from there to retail markets. One important way to do this is for government to arrange/provide, as extensively as possible, for direct transport of essential crops, and other commodities, from farms to agricultural markets, and from there to retail markets, and to simultaneously set up a system that enables manufacturers/retailers to directly purchase crops/commodities from farmers; something which the government was also planning.

Given the significant contribution of oil in prices of all essential commodities, including electricity, and its negative role in terms of carbon footprint, it is therefore important that Pakistan seeks assistance from China, a global leader in renewable energy businesses at large. China may be asked to provide long term financing of solar panels.

Moreover, financial and technical assistance is also taken for establishing sources of energy from wind. This will allow shifting in phased manners electricity production from furnace oil to renewable sources. This is all the more important, since building big dams will take a couple of years. While the technical experts would know better, the desert areas could be used to house solar panels. Financial support should also be sought from China for subsidising solar panels for public and businesses at large.

(Concluded)

Copyright Business Recorder, 2022