EDITORIAL: The State Bank of Pakistan’s (SBP’s) half fiscal year report 2023-24 was uploaded on its website on Wednesday. The Shehbaz Sharif-led government has been citing recent improvements in key macroeconomic indicators (strengthening foreign exchange reserves, current account surplus, a steady rupee vis-a-vis dollar) compared to last fiscal year, the announcement by the International Monetary Fund (IMF) that Pakistan’s 7 billion Extended Fund Facility (EFF) programme on which a staff-level agreement was reached on 12 July this year is scheduled for Board approval on the 25 of this month, and the recent upgradation of rating by two of the three international rating agencies as positive developments.
However, in final remarks the report makes two observations and associated recommendations that remain relevant to this day. First, that “intensive and successive nature of inflationary pressures stemming from non-monetary sources and vulnerabilities thereof, policy and structural challenges need to be addressed as a necessary tailwind to create a conducive environment for a long-term disinflationary trend to set in and to achieve low and stable inflation on a sustainable basis.”
SBP’s suggestion the government should set the inflationary target in consultation with the apex bank which would necessitate “deviations from planned fiscal policies, including the setting of administrative prices, are neither significant in magnitude nor in timing to avoid affecting monetary policy credibility and stoking long-term inflationary expectations.”
Sadly, this recommendation is unlikely to be implemented for the next 37 months, the duration of the EFF; the report further added appropriately that “a whole-of-the-government approach, across federal, provincial and local tiers of government and institutions is needed to check inflation.”
This implies that provincial governments should work in concert with the Centre to contain inflation, and not be tempted to extend subsidies for political point scoring, given that excess liquidity as a consequence of the subsidy, especially if it is unbudgeted, is highly inflationary.
Further, the bulk of provincial revenues are from the federal divisible pool and therefore from taxes collected throughout the country, and any one province extending a subsidy will be at some cost to the people of other provinces.
The report also correctly notes that addressing “the structural weaknesses would make monetary policy more effective and efficient…there are gaps in collective and up to date understanding of inflation dynamics in the country. Plugging these gaps in understanding requires concerted efforts by academia, government institutions, and policy research institutes alike.”
The SBP correctly notes that “sectoral reforms in agriculture and energy are critical to address the issues of supply-side constraints and inefficiencies, and their impact on prices. It is also imperative to relax the policy of price administration and to de-cap prices to help increase competition in the medium to long term and thereby lower inflationary pressure.
Moreover, whilst productivity growth is needed to improve supplies and lower per unit costs, there is also a need to significantly lower the pace of population growth to ease underlying demand pressures in the long term.” This government, like its predecessors, is focused on accessing external borrowing, which is linked to conditionalities that require administered prices and controlling population growth is way down on the government’s list of priorities.
This newspaper urges the government, rhetorically dedicated to lifting the country out of its economic impasse, must consider out of the box in-house solutions; notably, reducing the population growth rate, massive reduction from the budgeted current expenditure which would require voluntary sacrifice by the major recipients, and finally structural reforms with power and tax sector experts.
Copyright Business Recorder, 2024
Comments