The government's monetary policy stance with very high policy rate as well as overvalued exchange rate and heavy reliance on indirect taxes are responsible for price hike and dearness in the country and these are going to have serious consequences for the economy.
This was the consensus viewpoint of economic experts invited by the sub-committee of the Finance Committee of the National Assembly chaired by MNA Ayesha Ghaus Pasha, former finance minister Punjab, to give their opinion on reasons behind inflation. The meeting invited governor State Bank of Pakistan on September 30 to explain to the committee about the linkages of monetary policy with fiscal policy and the rationale of keeping policy rate far too high policy from the core inflation - 5 percent - and overvalued exchange rate.
The chairperson of the committee stated that far too high policy rate has serious consequences for debt servicing, budget deficit and inflation and led to slowdown of economic activities in the country which would lead to unemployment and poverty.
Former adviser to Finance Ministry Sakib Sherani, member Tax Reforms Commission and prominent tax expert Ashfaq Tola and President Lahore Chamber of Commerce Alma Haider have stated that government's policies fueled inflation in the country.
Sherani said that exchange rate, energy prices and increase in transportation cost have caused price hike in the country and there is need to reduce energy and gas prices. The government also needs to rationalize the development spending and allocations for low priority development projects should be diverted towards social sector to provide subsidy to the vulnerable.
Sakib Sherani stated that statement of governor SBP has created perception that policy rate is being kept high to attract hot money but there is stark difference between Pakistan and Egypt where $44 billion hot money was attracted. Exchange rate in Egypt was supported by foreign inflow from tourism whereas there is fear of depreciation of exchange rate in Pakistan so no one would be bring hot money.
Sherani said that the IMF wants its money back and that is why it wants hot money to be attracted. Ashfaq Tola said Pakistan is experiencing 11.6 percent inflation due to government policies which is very high in the region, whereas inflation in India is at 3.2 percent, Bangladesh at 5.2 percent, Sri Lanka at 5.6 percent and Vietnam at 2 percent. He also concurred with the other experts that policy rate and exchange rate are very high and need to be reviewed. He was of the view that the International Monetary Fund (IMF) program must be reviewed.
Almas Haider stated that the economic activity is facing slowdown while inflation has escalated owing to government's monetary policy stance and exchange rate. He stressed the need to change the energy mix and stated that decisions taken at the federal capital impact the industry across the country.
Deputy Governor SBP Jameel Ahmed, however, defended the SBP monetary policy stance and exchange rate and stated that there has been positive impact of exchange rate on exports which showed growth both in terms of volume and price in last two months. He maintained that Pakistan's exports would have increased by $2 billion if there was no decline in prices of commodities in the international market.
Jameel Ahmed added that inflation is one of the factors and not the sole factor for determination of policy rate. The monetary policy committee, which also has experts from private sector, takes into consideration broader outlook of the economy before making any adjustment in policy rate, he said and stated that it was not true that policy rate is being kept on higher side to attract hot money.
He further stated that inflation would be scaled down to 5.7 percent by the end of fiscal year 2020-21 and added that the SBP provides credit lines at discounted rate to different sectors of the economy to offset the impact of policy rate including SMEs, export industry, projects and others.
The deputy governor SBP stated that Pakistan's financing requirement in the current fiscal year would be around $8 billion as opposed to $14 billion for the last fiscal year and flatly dismissed that there was any understanding with the IMF on exchange rate target.
The FBR official conceded that the government has been facing stiff resistance on filing of sales tax return and CNIC condition and negotiations are still going on with the traders on these two conditions.
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