The newly elected government is in the process of devising the budget for the forthcoming fiscal year: a challenge by all accounts, made doubly so with the fear of increasing political polarisation over the judges issue which may well pit the government against its erstwhile coalition partner, PML (N), as well as the civil society.
In these economically trying times the government must take all the stakeholders on board with respect to budget proposals in an effort to ensure a consensus approach that would transcend party lines, thereby ensuring the full implementation of budgetary policies.
Notwithstanding some political hiccups in recent weeks, there is a political consensus about what are the major challenges facing the economy today, though there are bound to be some differences as to how best to tackle these challenges. The first priority that the government would have to deal with is ensuring that the public has access to staples and at affordable prices.
World food prices have escalated in recent months and the reasons, according to World Bank Managing Director Juan Jose Daboub, are varied ranging from growing demand, rising fuel prices, cuts in agriculture funding, increasing use of food crops for biofuels, distorting subsidies and trade barriers, financial speculation and bad weather. These elements are responsible for the erstwhile exporting countries to limit exports, which has in turn put further pressure on international food prices.
The ongoing wheat and rice crises in Pakistan, however, are due to flawed government policies rather than a shortage of the two crops. While the new governments, both at the federal and the provincial levels, are engaged in resolving these crises, yet there are indications that together with rising inflation the poor may still be unable to afford the five staples. In this regard it is proposed that the government consider the issuance of ration cards to those who have less than $2 per day income for wheat, rice, pulses, sugar and tea.
Pakistan, in common with other countries, appears to be in the grip of runaway inflation these days. The rising international oil prices which, on Wednesday last week, registered more than $129 per barrel, would have been considered in the realm of impossibility a year ago.
For Pakistan, expected to register a high budget deficit by the end of the current fiscal year, the rising price of oil is all the more worrisome as it increases inflationary pressures through a direct impact on transport costs and energy costs; and indirectly through its impact on the budget deficit. A budget deficit would require reduction of subsidies on domestic sale of oil, which would place a greater burden on the common man's ability to feed himself and his family.
This reinforces the need for ration cards in the short term or till such time as the government is able to bring a semblance of affordability into domestic food prices. While ration cards are opposed by most economists as creating market imperfections, yet the fact remains that without these cards at the present moment in time there is evidence to suggest that the poor may well become so disheartened that a more serious law and order situation may erupt.
Combating inflation would, however, require some additional measures. The government appears to be favouring an across the board rise in salaries. It is pertinent to note that this would generate wage push inflation and the rise in the cost of living as a consequence of the wage rise may well exceed the rise itself.
Contracting the money supply in the economy is another possibility. This is largely the responsibility of the State Bank of Pakistan that must take effective policy measures to curtail the supply of money in the economy. It is heartening to see that the SBP has taken steps in this direction and mopped up the high liquidity in the market.
However the federal government must also mop up excess liquidity through its fiscal policy, ie through widening and raising taxes, thereby reducing the money in circulation. Energy shortages are yet another problem facing the newly elected government.
While several short, medium and long-term solutions have been proposed and discussed, yet there is also a need for the government to look at the pricing of POL products, prices of diesel in particular and gas.
Gas prices need to be pegged to the price of fuel oil, that is a deregulated product and fluctuates with the international price of oil. Exceptions can be made for some priority sectors that may include fertilisers, tube wells and the textile export sector which is a major contributor to the country's total export earnings and hence a major foreign exchange earner.
As noted above, a rising budget deficit would increase inflationary pressure. Additionally, it would also increase government's indebtedness which maybe plugged through deficit financing within safe limits and reliance on borrowing from abroad.
Both policies are fraught with problems, and therefore, it is hoped that the government would curtail its expenditure in an effort to bring the deficit to acceptable levels. It is also hoped that the present government increases the accountability of expenditure, with no institution considered as a sacred cow, while at the same time making each and every paisa spent count.