Unsound decision

The rumour mill abuzz with news on Thursday that Prime Minister Gilani would announce the withdrawal of the recent hike in petroleum and product prices in the National Assembly proved accurate and the government backtracked on a major macroeconomic strategy commitment made to the International Monetary Fund (IMF) under the Stand-By Arrangement (SBA).
Failure to comply with agreed IMF conditions has already led to a delay in the fifth and second last review of the SBA, whose successful completion would have led to the release of the second last tranche so desperately needed by the country's economic managers. Equally disturbing for the Pakistani government and made patently evident subsequent to the Tokyo Friends of Democratic Pakistan meeting held in April 2009 is the fact that bilaterals and multilaterals are unlikely to disburse pledged assistance until and unless the IMF conditions are met and the Fund staff satisfied that the government's economic strategy is on the agreed track. That clearly was not the case even before the withdrawal of oil prices. It is even less so now and may further delay the fifth review.
It is donor confidence on the IMF assessment, not extended to claims by the economic team of this country, that may have led to Hillary Clinton, the Secretary of State, to say: "we have made it clear, as I did in a meeting with their (Pakistani) ambassador, that we think it is a mistake to reverse the progress that was being made to provide a stronger economic base for Pakistan and we will continue to express that opinion." Unfazed by the enormity of the likely impact on foreign assistance by his announcement of withdrawal of POL prices, reflective of what critics believe is his complete lack of understanding of the country's economic compulsions, the Prime Minister requested the visiting Acting Special representative on Afghanistan and Pakistan Frank Ruggiero to speed up the release of funds under the Kerry-Lugar bill and once again lamented the failure of donors to disburse pledged assistance.
What is, however, more unfortunate was the self-congratulatory mood in the National Assembly with each political party, the government's erstwhile coalition partners, as well as those sitting on the Opposition benches, claiming credit for the price reversal and saying that it was in the interest of the hapless people of this country. While one may be tempted to excuse the regional parties for holding a view so contrary to what basic economic theory argues yet one cannot absolve the PML (N), a party which boasts a number of economists in its ranks, for expressing such a view.
It is fairly evident that the country's parliament has performed very poorly in terms of bringing the income of the rich rural landlords within the income tax net. Considering that an agreement was reached on many thorny issues as indicated by the passage of the 18th and 19th Amendments, as well as the agreement on the 7th National Finance Commission Award, continued failure to deal with the imposition of a tax on the income of rich landlords is an indication of our parliamentarians' dogged resistance to a tax payable by a majority of those in their own ranks. Corruption, too, remains rampant and accusations continue to be hurled at the senior PPP leadership - accusations that are taken up by the courts who have time and again expressed their lack of confidence in investigations carried out by federal agencies, including the FIA.
Given that the PPP is a minority party the blame for continued corruption, be it routine defiance of public procurement rules or nepotism in appointments, cannot be limited to the majority party in the coalition but has to be shared by all. And opposition to some of the IMF conditions agreed by the government, especially those related to eliminating subsidies and increasing the tax-to-GDP ratio, including the implementation of the Reformed General Sales Tax, is an inappropriate discharge of each parliamentarian's responsibility regardless of whether she or he is a member of the government or the Opposition.
The economic implications of the reversal of oil price rise that was attributed to the international hike in the price of oil will be adjusted within the taxes that were levied on the oil sector: petroleum levy has been reduced from 10 to 4.27 rupees per litre and Inland Freight Equalisation Margin in Light Diesel Oil by Re. 0.73 per litre. This in turn, would imply a reduction in the government's already inadequate revenue generation capacity which would lead to a rise in the deficit that, in turn, would be plugged by enhanced borrowing from the banking sector - a highly inflationary policy. In other words, the decision to withdraw oil prices would not have a zero-impact on inflation. One hopes our parliamentarians know what they are doing.