The government's economic policies, both fiscal and monetary, are fueling inflation in the country and there is urgent need to minimize expansion of monetary policy, reduce policy rate and stabilize exchange rate to tame inflation in the country. This was the gist of the deliberations of sub-committee of National Assembly Standing Committee on Finance which met here on Tuesday with Dr Aisha Ghaus Pasha in the chair to finalize the recommendations to contain inflation.
The committee recommended: (i) indirect taxes on consumer items should be removed to reduce inflation; (ii) to address the inefficiency and mismanagement in energy sector instead of passing on the burden to the consumers through tariff; (iii) to adopt real austerity measures, as monetary expansion is the biggest contributor to inflation, and rationalize but not reducing the development budget; (iv) to reduce the policy rate to give signal that economy is getting better, reduce the debt servicing cost and eventually contribute to lowering inflation and increasing economic activity; (v) to reduce the fiscal deficit; (vi) and to reduce exchange rate.
The chairperson and members of the committee identified with consensus that policy rate is one of the key factors leading to stagflation and there is a need to reduce it to spur economic activities. Dr Ayesha Ghaus Pasha said that as the most important area of concern for the common man is spike in inflation and "we want to conclude recommendations to be placed to the main committee tomorrow (Thursday)."
The experts invited by the committee were also in consensus that exchange rate, energy prices adjustment, policy rate and indirect taxes have been impacting the real sector and fueling inflationary pressure.
Dr Aisha Ghaus Pasha said that according to the experts, impact of the government policies is now becoming visible on supply side and the inflation is cost-push and not demand-pull.
The government borrowing to finance the fiscal deficit is another factor behind inflation in the country and consequently Pakistan is experiencing high inflation and policy rate employed to deal with it is affecting competitiveness of the economy.
The committee members wanted the SBP officials to justify the increase in policy rate but they failed to do so. The committee asked the Finance Ministry to bring down the fiscal deficit and forewarned against pursuit of hot money and stated "we should not play with the hot money because of economic conditions and foreign exchange reserves; otherwise, the country can face the Egypt like experience.
The committee said that use of exchange rate to compress the imports would entail negative consequences for other sectors of the economy and there is need to stabilize it as general perception is that exchange rate would further increase. There is need to discourage this perception, the chairperson remarked.
The subcommittee also asked the chairman Federal Board of Revenue to review indirect taxes on consumer items to control inflation.
Chairman FBR Shabbar Zaidi agreed to the committee that there may be some cartelization behind sugar price increase as sales tax impact was Rs 3.6 per kg, thereby taking the per kg price to Rs 60 whereas per kg sugar price in the market was between Rs 75-80 per kg. He said that in his opinion, rate of VAT should not exceed 12.5 percent, adding, "When we will expand the tax net, sales tax rate will be reduced".
Hina Rabbani Khar said, "The government policy on fiscal and monetary sides has been fueling inflation and State Bank of Pakistan (SBP) is unable to explain to the committee about the benefit of high policy rate to the economy."
The deputy governor SBP said that legally decision with regard to policy rate is prerogative of monetary policy committee and he was not in a position to commit anything to the sub-committee.
The SBP officials stated, "We expect inflation to recede in the second half of the current fiscal year." He stated that stabilization measures do have some effect on the economy, adding, "We have also made it clear that there is no secret agreement with the International Monetary Fund (IMF) about exchange rate and it would be market-based and inflation projection was initially at 13 percent primarily because of speculations by media about exchange rate fixation." He said that forward exchange rate is Rs 163 for the next six months.
Aisha Ghaus Pasha said that according to former finance minister Dr Hafeez Pasha's macroeconomic model, most important factors contributed to inflation in fiscal year 2018-19 was 50 percent imported inflation whereas monetary expansion to finance the fiscal deficit contributed to 27.5 percent to the inflation, and inflationary expectation contributed 17.9 percent to the inflation. She said that as per model, indirect taxes contribution on inflation was very nominal in the last fiscal year.
She further stated that according to the model, in the current fiscal year monetary expansion would contribute 33 percent to the inflation, imported inflation would be around 23 percent and inflationary expectation would contribute 19 percent to inflation.-ZAHEER ABBASI