Macro numbers – inflation and interest rates, are improving. The current account is in control and foreign exchange reserves are growing. But this recovery might be short-lived. It’s not a time to sit back and relax; rather to take tough decisions. The IMF review(s) are stuck in limbo due to electricity and gas tariff revisions, and revision of NEPRA and SBP acts. The tough ones are tariffs. Sooner or later these have to be revised up. Less difficult time is when the inflation is taming – hit the nail and get over with it.
Historically, decision makers in the country delay the tough economic (unpopulous) decisions till they become inevitable. But by doing so the cost is usually high. It’s time to think rationally and swallow the tough pill when the pain would be less severe. But the fear is that complacency will prevail.
Reserves have built up due to flows coming in from multilaterals, and most flows are and were in the form of debt; market based flows are drying up. The foreign direct investment, exports and remittances outlook is not promising till we address the structural bottlenecks (mainly in energy). Inflation is calming down (despite higher monthly numbers) due to base affect – Inflation from Sep20 to Jan21 is likely to be between 5-7 percent due to the base effect.
The time is right to make energy tariffs revision without making the inflation numbers too ugly. The amount is estimated at Rs160 billion that is to be passed to the consumers – impact on tariff is around Rs1.5 per unit. Fuel adjustment is pending since January as well. With low oil prices, the impact would be less too. Then there is gas tariff revision on Rs73 billion overdue – due to supply of RLNG to domestic consumers at cheap rates in winters.
Government may plan to make the revision in a staged manner – spanning over 3-5 months during low inflation period. Else, such decisions will have to be taken in tough days. Pakistan cannot afford to go out of the IMF programme – with increasing reliance on multilateral flows.
The government is now trying to revive economic growth. With low interest rates and building foreign exchange, there might be some pressure on imports in the next few months or quarters. Once that happens, reserves will start falling. And we have to do what IMF will ask irrespective of inflation and other macros at that time as we cannot afford the Fund programme to derail.
Nonetheless, this will remain a political decision. It’s the PM’s decision. And politically, this will never be easy. But it cannot stay pending for long. The base tariff revision should be done in the next six months.