Stabilisation to last longer

Pressure is mounting on the PTI government to come up with pro-growth policies sooner than later. However, the IMF and SBP are probably thinking that stabilization has just started and it would be too early to ease any kind of fiscal or monetary policy for spurring growth. The need is to find a midway. The economic performance from the lens of the IMF is encouraging as the first quarter results are apparently good. But it's a long journey, and there is little room for getting complacent.

The problem with the PTI government is that it has opened up too many fronts to fight, and now all of these are converging to haunt the government. Had the government have a better and clearer plan along with an able team to execute for the day one, the situation could have been different. But, in essence, it is learning by doing, and mistakes are made in the process. It is tough to continue with economic reforms, including stabilization polices, and accountability concurrently.

The fallback was inevitable; and it is happening. The recent event of JUI-F is somehow not only joined by opposition parties but also by other actors such as traders and retailers. The government negotiation room diminishes and they have to give something in return to different stakeholders to defuse the situation. In case of traders, many of the demands were met last week and now not only the turnover tax rate is low but also the ambit of small traders (with relaxed conditions) is expanded. The bone of contention is the requirement of CNIC on over Rs50K transactions and that has been delayed by another three months.

As long as government does not give upon the CNIC and other conditions necessary for documentation, lower tax rates and other factors can be dealt with in future. The trader community, especially in Punjab, is simply not used to pay taxes, and they every time in the past have succeeded in it. It is a tough nut to crack, and it will take time. For the time being, traders have an upper hand.

It is not only the JUI-F show that is mounting pressure, but the short to medium term economic pain is making people agitated as well. For instance, according to a recent Gallup Poll, 53 percent of respondents said that inflation is the biggest problem followed by unemployment (23%) while issues like Kashmir and corruption have much less bearing. The government has to focus on reducing inflation and generating employment as without doing so the agitation will keep on building.

That is why Ministry of Finance is apparently trying to ask the IMF for tax concessions and relaxation in lieu of better performance in the first quarter. However, the Fund may ask for more time to ensure that stabilisation is cemented. It's too early to test the water, perhaps. Some innovation and compromises are required to ease the situation. Probably, these are coming on political front where some give-and-take game is under play.

But that would not be enough. Issues are economic and a solution has to be on the economic front. Giving some bounties to traders is one. The recent slowdown, post July, is primarily attributed to documentation push. Many retailers and traders are refusing to do documentation and they are part of the economic value chain. The affectees are from top to bottom - from big companies like auto assemblers and FMCGs to manufacturing and service SMEs associated with them.

The other problem is that government development spending has shrunk significantly, and that is adversely impacting growth as well. The LSM index decline is biggest since 2009. The government has to incentivize a few sectors for making investment. The talks are that there is a Finance Bill in the making at MoF where some relaxation for real estate development (mainly construction) are in the offing, apart from some ease in transactions taxes frictions.

The tough time may continue for another 6 to 9 months. The IMF may ask for better performance to continue for 2nd and 3rd quarter. Meanwhile, reserve building exercise will continue to create much needed buffer. The SBP and banks will keep on working on attracting the portfolio investment in government debt. Concurrently, a good chunk has to be fetched from Euro Bond. The fiscal consolidation is likely to continue.

Copyright Business Recorder, 2019