EDITORIAL: The governor State Bank of Pakistan (SBP), Jameel Ahmed, while briefing the Senate Standing Committee on Finance projected Gross Domestic Product (GDP) growth rate at 2.5 percent to 3.5 percent in the current fiscal year but warned that inflation may increase during the last quarter of 2025 (April-June) and the first quarter of 2026 (July-September).
These observations are in synch with the Monetary Policy Statement (MPS) issued on 16 December 2024 that maintained that “growth prospects have somewhat improved, as reflected by the recent uptick in high-frequency indicators of economic activity… .
Moreover, the latest high-frequency indictors — such as domestic sales of cement, auto, fertilizer and POL products — suggest that this momentum in industrial activity is continuing.“
However, Pakistan Bureau of Statistics (PBS) suggests that the rise in sales is backed not by an increase in manufacturing output which declined by negative 0.65 percent (1 July to October 2024) but in all probability through a reduction in inventories.
In addition, nearly all productive sectors of the economy are clamouring for the reinstatement of fiscal and monetary incentives that have been withdrawn as conditions for the ongoing International Monetary Fund programme.
The Committee members did not challenge the Governor on the MPC growth estimate based on a decline in inventories or indeed on the ongoing relocation of many industrial units outside the country due to the severely contractionary monetary and fiscal policies that may have come down from before — discount rate declined from 22 percent in April 2024 to 13 percent in December (which is still at least double the regional average) and the tax measures consisting of indirect taxes (whose incidence on the poor is greater than on the rich) continuing to account for over 75 to 80 percent of the total revenue falling short of the target by around 380 billion rupees during the first half of this year — a decline that would fuel borrowing with a rise in the debt servicing costs and a further slash in development outlay negatively impacting on growth.
The MPS also noted that the sharp decline in inflation “was mainly driven by a favourable base effect from gas prices, along with the continued moderation in food inflation and benign global commodity prices.
The Committee noted that these factors are likely to continue in the near term and may bring headline inflation even lower in the coming months.
Accordingly, the Committee assessed FY25 inflation to average substantially below its earlier forecast range of 11.5 — 13.5 percent.“ PBS calculated headline inflation at 4.1 percent for December and an average for the half year at 7.22 percent with urban at 8.74 percent and rural at 5.08 percent – with the latter indicating that the expectation is for food inflation to remain low not only in the country (seasonal) but also without (import of cooking oil and other food items).
This expectation may not be met primarily because the government has accepted the IMF contention that its “price setting and procurement operations have made the agricultural sector unresponsive to changing consumer preferences, exacerbated price volatility and hoarding, undermined the incentives for innovation, misallocated resources, and placed a burden on fiscal sustainability.
Going forward, these interventions should be discontinued… Any purchases of agricultural commodities by SOEs or provincial food departments should be done solely for purposes of a narrowly defined national food security, and not as quasi-fiscal social policies, including to boost farmers’ income or provide untargeted subsidies for staples.“
And, the two economic team leaders, Governor SBP and the Finance Minister, have also agreed with the Fund that “policy rates will remain substantively positive in real terms and data-dependent to adjust quickly to evolving price dynamics.
At the same time, to support monetary policy formation and implementation, the inflation expectation survey will be aligned with best practice.
More broadly, reducing fiscal dominance and credit objectives will be conducive to stronger monetary transmission and foster financing deepening and allocative efficiency, including by (i) limiting public sector borrowing demands through fiscal consolidation; (ii) retrenching from credit allocation, such as via SBP’s refinance schemes, allowing a broader role for market forces; and (iii) relinquishing state ownership of financial institutions.“
The capacity of the government to meet these macroeconomic objectives would be a challenge, given the shortfall in the target tax revenue, market forces sadly are not even operating in sectors where perfect competition conditions prevail (for example in cement, sugar, wheat and textiles sectors) due to a proliferation of influential producers’ organisations and the fiasco and ill preparedness evident in the PIA bidding process show a singular lack of competence.
To conclude, one would urge the committee members who represent the people of this country to be prepared with serious questions rather than accept the same inexplicable defence.
Copyright Business Recorder, 2025
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