A hands-on PM

To evaluate the impact of economic policies, fiscal and monetary, is a complex process because of the interdependence of major macroeconomic indicators that invariably have their pros and cons. For example, a high discount rate would curtail productivity as the cost of capital rises with a consequent negative impact on employment levels while making imports of raw materials and semi-finished products (major import items for the country's industrial sector) less attractive thereby plummeting the current account deficit as has happened in recent months. To focus entirely on a reduction in the current account deficit, while ignoring the decline in productivity which in turn reduces the growth rate of the economy, is neither politically nor economically astute analysis. Business Recorder has maintained that the government's monetary policy, linking the discount rate to Consumer Price Index (CPI) is not an appropriate policy given that (i) State Bank of Pakistan' (SBP's) research paper 2006 correctly notes that "extreme price changes in the tails of the distributions are considered unrepresentative of the underlying inflation trend" and instead it must be linked to core inflation - a policy supported during the tenure of all previous governors; and (ii) pricing of imported petroleum and products, a major source of revenue of Pakistani governments, including the incumbent, is not responsive to the discount rate either.

Previous administrations relied heavily on taxes imposed on imported petroleum and products to generate revenue as it was easy to collect, at the sale point, and the Federal Board of Revenue merely ensured compliance. During the Zardari-led government, the international price of petroleum and products had sky-rocketed to 140 dollars per barrel yet during Ishaq Dar's tenure as the finance minister, international prices of oil had plummeted but were not passed on to the consumers to create fiscal space to reduce the budget deficit. It is very disturbing that the gains made were frittered away after the 2013-16 IMF programme was completed.

Recently, the international prices of oil plummeted but like during the Dar years, those were not passed on entirely to the consumers. Petroleum levy, not part of the divisible pool, was nearly doubled to generate revenue which would be credited to the federal treasury. In this context, for the Prime Minister to commend his economic team over its reported refusal to present a mini-budget to the IMF team during the second quarterly review is baffling.

There is no doubt that the cost of borrowing is extremely high and is a factor in the decision of the productive sectors not to expand with some opting to reduce productivity as indicated by the consistent negative growth in large-scale manufacturing sector whose fallout on medium to small manufacturing units is also apparent. It is, however, baffling as to why the Pakistani exporters have not taken maximum advantage of the GSP Plus status awarded by the European Union as that gives them an advantage over and above their regional competitors' disadvantage due to a higher discount rate and higher utility prices. It is hoped that the domestic exporters maximise their cost advantage under the scheme that has been extended for two years while at the same looking to enhance exports not by exporting our surplus but by identifying and producing those products/services that have a market abroad.

With the decline in the international prices of oil, there are concerns that the US shale gas, to which US banks are overexposed, may no longer be economically viable which would impact negatively on the dollar. Reports indicate that the SBP is not even looking at this possibility which would have further negative consequences on the state of the economy. The SBP's research wing since last year has performed inadequately as it has yet to release a paper that justifies the use of CPI rather than core inflation to set the discount rate and has not given any consideration to the decline in the dollar and its impact on our economy.