Therefore, such policy increase will likely do a lot of harm to the impact of bottom-up approach by the previous government has adopted since the start of the pandemic. It will also undermine the facilitating role played by SBP in this regard.

Meanwhile, the IMF remained persistent with government to remove subsidies on oil and energy, as highlighted in the May 25 concluding statement of discussion as ‘The team emphasized the urgency of concrete policy actions, including in the context of removing fuel and energy subsidies and the FY2023 budget, to achieve program objectives’.

Hence, removal of oil and energy subsidies, along with overboard monetary tightening, may most likely lead to feeding in strong stagflationary consequences for an economy that has still seen little inclusive growth, and growth for only two years.

Both the IMF and the government will need to understand that developing countries in general, have already reached the limits of macroeconomic policy instruments usage for a number of months now.

So, what is needed is that rich, advanced countries, and multilateral institutions should provide developing countries meaningful debt relief and financing, so that their fiscal and balance of payments issues could be appropriately addressed by allowing them to follow non-austerity/counter-cyclical policies, which is needed for sustained macroeconomic stability, economic recovery, and where economic growth is meaningfully inclusive.

Here, it needs to be remembered that this growth momentum was achieved on the back of large growth sacrifice given to achieve macroeconomic stability before the pandemic under the IMF programme negotiated in the initial years of the previous government, and through following counter-cyclical policies (including lowering policy rate).

Policy rate and oil subsidy — I

Moreover, this growth momentum was also supported by stimulus (however little) that was provided during most of the initial two years of the pandemic along with some fiscal space created by some debt moratorium, and only $2.75 billion in enhanced SDR allocation.

Hence, it does not make sense to roll back the counter-cycle policies when they primarily led to safeguarding against deep and prolonged recession, and then a good economic recovery over the last two years, just because of lack of significant debt relief, and enhanced allocation of SDRs up till now. That increasing policy rate is in contradiction of ground realities is a fact.

There is a need to internalise the realization that growth needs to be broad-based for reducing the rising level of inequality, as discussed above, through continuation of counter-cyclical policies. There is also a need to make a greater effort to attract greater financing.

The situation requires much more debt relief than provided up till now. The reverse set of policies, will most likely lead to fuel inflation, mainly in the shape of cost-push inflation and will, in turn, possibly cause increase in policy rate and with it cost of borrowing and burden of debt repayments along with increase in poverty and inequality.

It is quite unfortunate that while there are clear signs that the growth momentum was achieved through a policy of non-austerity/counter-cyclical policies, including that of keeping a well-founded lose monetary policy stance, the acting SBP governor called it ‘unplanned fiscal expansion this year’.

Here, although the governor may mean this expansion as more than just subsidies, including the particular case of oil subsidy, former finance minister Shaukat Tarin has on more than one occasion explained both how oil subsidy was to be supported from Pakistan’s own fiscal sources, and that in their discussions with the government back then the IMF had agreed with this subsidy plan of government.

The problem is that even if the stimulus/subsidy plan was difficult to manage — including facing a difficult fiscal deficit to fall somewhere between 6 percent to 7 percent of GDP, during the current fiscal year — overboard tightening of monetary policies, which it is for a number of months now, and where policy rate needs to be brought down to well below double digits, reducing/eliminating subsidies and overall following a pro-cyclical policy stance will not only throw growth off the current momentum (achieved with great difficulty), but will most likely increase inflationary pressures beyond the very short-term.

Also, the much-needed bottom-up approach to make the current growth more inclusive, which is needed to be built upon where the previous government left, will virtually evaporate and cause greater inequality, poverty, with likely increase in political instability.

Moreover, by insisting that Pakistan should remove oil and energy subsidies, rather than working towards relocation of enhanced SDR allocation from last August, from rich, advanced countries to developing countries, under the IMF’s ‘Resilience and Sustainability Trust’ (RST) window, the IMF has shown poor understanding of the significant role of these subsidies on growth and inflationary consequences for Pakistan’s economy, not to mention in terms of poverty, inequality, and even in terms of likely increase political instability in the country.

Not only will overboard monetary tightening most probably lead to greater cost-push inflation, it will also add to debt burden, which is already quite high. Also, higher interest rate — which is indeed unnecessary and should be well below the double-digit mark — will likely squeeze fiscal space for government to provide much-needed and a meaningful level of oil subsidy to sustain growth momentum and invest in public health sector.

Moreover, addressing balance of payments concerns through raising interest rates is indeed undesirable since it is important to protect that segment of import demand that is important for growth overall.

Here, higher cost of capital for making imports that contribute to growth will likely reduce magnitude of such imports, and will also raise cost-push inflation in the country, which, in turn, will also reduce the already weak level of inclusive growth. Instead, import demand should be restricted in a very targeted way through expanding the negative list (for more elastic luxury commodities), and increasing tariffs on others that are less elastic but still fall under non-essential items.

At the same time, balance of payments pressure should be managed by greater effort in terms of obtaining meaningful debt moratorium/relief, and in attracting higher financing, especially in terms of relocated SDRs.

Here, it also needs to be pointed out a related aspect of oil subsidy, as proposed by some economic analysts that only or mostly very targeted level of oil subsidy to motorcyclists, and tube-well owners is provided.

Although they indicate that as an alternate to providing subsidised oil to motorcyclists on petrol pumps, and rightly so, since it is difficult and highly costly to monitor, targeted subsidies to these two groups are provided based on database of people with motorcycles and tube-wells, which is available with the government as per surveys in recent years, yet such databases will firstly suffer from time lags with regard to actual situation of ownership, not to mention the fact that people with small cars also fall in a similar category of income and need subsidy, in addition to institutional capacity issues/corruption opportunities present in getting that subsidy reaching the deserving person.

Having said, therefore, oil subsidy needs to be provided in terms of reduced prices of petroleum products (such reductions take place in a rational way) across the board, given oil prices significantly feed into cost-push inflation in most parts of the economy, including electricity generation.

PM Shehbaz Sharif in the wake of Rs 30 per litre raise in prices of POL products, announced a targeted subsidy to mitigate the impact of this increase in the shape of, firstly, Rs 2000 to BISP-registered people, who number at one-third of the total population, and secondly, availability of 10kg flour sack at Utility Stores at a subsidised price of Rs 400 per sack.

This targeted subsidy falls well below the likely inflationary impact of this significant rise in oil prices, virtually throughout the economy, given inflation is already at a high level of 13.4 percent. And high inflation along with high level of policy rate at 13.75 percent is likely to feed into a lot of cost-push inflation, causing slowdown in overall growth, in exports in particular and with it foreign exchange reserves, adding, in turn, more pressure on currency, and with it building-up more imported inflation.

This will not only put in a new cycle of policy rate chasing inflation, if the trend of many months is any indication, but will also likely increase inequality and poverty on one hand, and political instability, on the other. Therefore, it would have been better to provide a rationalized general level of subsidy on oil, rather than most probably facing higher cost of borrowing, increased level of debt burden, and output loss.

(Concluded)

Copyright Business Recorder, 2022