A panel of economists who had submitted a report to the government in October 2008 highlighting issues and recommending policy actions termed monetary policy from 2002-2008 as ineffective and held monetary authorities responsible for the unprecedented rise in inflation, which has crushed the poor people, sources told Business Recorder.
They said that the panel had given a detailed presentation to the Economic Co-ordination Committee (ECC) of the Cabinet in its meeting on May 19, 2009, on the invitation of Advisor to Prime Minister on Finance, Shaukat Tarin, who is also Chairman of the ECC.
"Expert economists in their presentation to the ECC held loose monetary policy from 2002-08 and lack of independence of monetary authorities responsible for unprecedented high inflation in the country," sources said. According to the economists, high inflation was contributing to increasing vulnerability and fall in real income of lower, middle and fixed income segments of the society.
"There is uncertainty about future business environment, instability of the financial system, erosion of business and investor confidence and slowing down of real economic activities like investment, economic growth and employment," sources quoted the economists as saying. The present government inherited a perfect storm, but government credibility should be firmly established to fight inflation. Although the government is on the right track but prices cannot be brought down administratively as inflation this time is a monetary phenomenon, sources quoted the economists as observing.
Sources said that ECC stressed on expansion of the tax base and raising the tax-to-GDP ratio. Some members observed that new areas should be brought under the tax net and, to improve tax collection, administrative set-up should be overhauled. "Present government intends to follow inclusive policies to enhance tax collection and would certainly avoid destructive policies," sources quoted Shaukat Tarin as saying.
According to sources, the economists advised the Finance Ministry to reduce budget deficit, cut expenditure, do away with circular debt, retire federal government debt to State Bank of Pakistan (SBP), refrain from further borrowing, and constitute a fiscal and monetary policy co-ordination board. The panel of experts was informed by Shaukat Tarin that all prescribed steps had already been taken by the government, including reconstruction of the board.
A couple of days ago, International Monetary Fund (IMF) stated that a prolonged economic recession could increase the number of poor in Pakistan. "Growth is slowing down, while financial sectors are now showing some signs of vulnerability," Paul Ross, IMF resident representative in Pakistan said.
On May 20, the Federal Cabinet was briefed by Tarin that the current account deficit and fiscal deficit have been brought down to 5.3 and 4.2 percent, respectively, from 8.4 percent and 7.4 percent. Inflation and trade deficit have also come down and efforts are afoot to bring inflation down to single digit by the end of current fiscal year.
Analysts are of the view that inflation will rise after the budget is announced, as sales tax is expected to be revised upward by one percentage point.