EDITORIAL: Caretaker Prime Minister Anwaarul Haq Kakar has pledged to continue the economic policies of the outgoing government while being briefed on the current economic situation by various ministries.
The same day price of petrol and high speed diesel were raised with no changes to the petroleum levy that was imposed by the outgoing government – 55 rupees per litre on petrol and 50 rupees per litre on high speed diesel, the two major contributors to reaching the ambitious petroleum levy target for the current year of 869 billion rupees, ambitious because of the consistent decline in consumption due to the prohibitive price of imported fuel and a consumer price index of 28 percent.
It is, however, relevant to note that the levy falls short of the pledge made by the outgoing government to the International Monetary Fund (IMF) under the nine-month 3 billion dollar Stand-By Arrangement (SBA), deemed critical to averting a possible default, that the path of levy hike must reach an average rate over the current fiscal year of 55 rupees per litre, which will add 79 billion rupees to revenue.
True, that this average can be reached later as the maximum petroleum levy of 60 rupees per litre has been approved by the now dissolved parliament; however, unless the price of imported fuel declines significantly in the international market and the rupee-dollar parity strengthens, indicative of improving macroeconomic fundamentals, any downward price adjustments would be highly unlikely.
One would also urge the caretaker Prime Minister to draw a distinction between the policies of the outgoing government and those agreed with the IMF under the SBA.
The then finance minister, Ishaq Dar, was bafflingly allowed by the eleven-party coalition government to implement two major flawed policies from an economic perspective (spanning a period from his appointment on 27 September 2022 till the staff-level agreement on the SBA was reached on 27 June 2023 because of the then Prime Minister Shehbaz Sharif’s direct interaction with the Managing Director of the IMF) that violated the agreement with the IMF that Dar’s predecessor and party loyalist Miftah Ismail had reached in August 2022: (i) a controlled interbank rupee-dollar rate without the foreign exchange reserves required to intervene in the market that led to a 4 billion dollar decline in remittance inflows through official channels in comparison to the year before; and (ii) a 21 percent rise in current expenditure in the revised estimates of last year from what was budgeted, which had the approval of the Fund and which, in turn, upped the budget deficit to unsustainable levels, a primary cause for high inflation today.
These flawed policies prompted the Fund in its August 2023 SBA documents to highlight concerns of “uneven implementation” with respect to the Ministry of Finance; and to state that “despite mounting pressures, actions by the State Bank of Pakistan lacked clarity as it kept its policy rate unchanged in its Monetary Policy Statement issued in August, October and early June expecting that the price rises had peaked and would subside, but hiked rates in November, March, April and late June,” with the late June hike widely seen as a prior condition of the Fund under the SBA.
It is therefore critical for the caretakers to take cognizance of both fiscal and monetary policies of the outgoing government and attempt to generate some leverage with the multilateral and bilateral lenders through not only adhering to the conditions agreed with the Fund under the SBA but perhaps also slash current expenditure in an effort to create fiscal space rather than to do the usual: transfer of the onus of creating fiscal space to the general public through levying higher taxes on existing taxpayers and those too in the indirect tax mode, whose incidence on the poor is greater than on the rich (an example being the petroleum levy) while raising current expenditure through domestic and foreign borrowings.
The consensus that the caretakers were empowered specifically to ensure that there are no hiccups or hurdles in foreign investment inflows pledged by friendly countries, to be facilitated through Special Investment Facilitation Council committees represented by federal, provincial and military personnel, may perhaps be on the side of optimism as these pledges were repeatedly made in the past though inflows have been slow and in the case of electricity generation projects, the terms agreed have been to the detriment of the general consumers as well as the exchequer.
While we fully support facilitating foreign investment inflows but at the same time we also must stress that it is also critical to ensure that past mistakes are not repeated on the grounds that the country, given its current economic impasse, cannot be more aggressive during contractual negotiations.
While the dates of elections and the induction of an elected parliament remain unclear, yet we hope that the caretakers focus on short-term measures that must include slashing current expenditure (budgeted at 53 percent higher than what was budgeted for 2022-23 and 26.5 percent higher than the revised estimates of last year), reforming the energy sector to improve governance rather than to simply raise utility rates, and engage in reforming the unfair, inequitable and anomalous tax structure – measures that would catapult the caretakers as the only achievers on the economic front in this country’s chequered performance during the last decade and a half.
Copyright Business Recorder, 2023