EDITORIAL: Prime Minister Imran Khan declared inflation a serious challenge impacting the most on the poor during the Tuesday cabinet meeting, which was also attended by provincial chief secretaries and food department secretaries, as per the Minister of Information Shibli Faraz. While this indicates the Khan administration’s growing concern with respect to rising food inflation yet as the public has learnt to its cost a cabinet discussion or indeed public acknowledgement of a problem does not always lead to its resolution. In the case of inflation public skepticism is all the more relevant for two reasons.
First and foremost, two advisors to the prime minister with critical portfolios challenged the integrity of data, particularly on prices, collected by the Pakistan Bureau of Statistics (PBS) notably Dr Hafeez Sheikh, advisor on finance, and Razzak Dawood, advisor on commerce. Their comments were reported in the media; however to this day no action has been taken to strengthen/improve the performance of the PBS to ensure data integrity that would enable the economic team to take appropriate policy decisions.
And secondly, the focus of the Prime Minister and his cabinet during their public interactions appears to be entirely on supply side issues which include (i) seasonal rise in prices of perishables, (ii) Sindh government’s recalcitrance (specifically with respect to wheat while ignoring the issue in Punjab and Khyber Pukhtoonkhwa), (iii) profiteering by shops/traders, and (iv) artificial shortages created by cartels to raise prices and/or smuggling through our large porous borders.
While these factors are certainly impacting on prices the government must acknowledge its own policies are also contributing to inflation. The government reached a staff-level agreement with the International Monetary Fund on 12 May 2019 wherein it accepted: (i) a high discount rate which choked off output in large scale manufacturing sector leading to a projection of 1.5 percent growth rate, (a rate which was further downgraded to negative 0.4 percent due to the pandemic) and a rupee depreciation that led in June 2020 to a real effective exchange rate of 93 as opposed to 98.5 in May 2019 (a fact that indicates the rupee is undervalued with a consequent impact on imports of raw materials and semi finished products that in turn continues to raise costs of production); (ii) a budget deficit of 7 percent in 2019-20 based on an unrealistic revenue target of 5.5 trillion rupees and a current expenditure rise from 5.5 trillion rupees in 2018-19 to 7.6 trillion rupees in 2019-20 (so much for curtailing expenditure). In effect, the budget deficit for last year was 8.1 percent, which is unsustainable and has a major impact on inflation; and (iii) a pledge to attain full cost recovery of utilities however the Khan administration, like its predecessors, relies on raising tariffs rather than improving efficiency (reflected by a rise in circular debt from 1.2 trillion rupees inherited by the Khan administration and the current debt of 2.3 trillion rupees) which, in turn, has further raised costs of production that are being passed onto the consumers.
What should also be source of concern for the government is the deferral of the raise in tariffs (electricity and gas) as recommended by the sector regulators because of fear that any further raise would fuel public discontent – a deferral that is reportedly opposed by the IMF and is the reason behind the failure to reach an agreement on the second quarterly mandatory staff review. The second tranche release therefore remains pending with a consequent impact on the country’s capacity to borrow at reasonable terms from bilaterals and foreign commercial banks as well as issue sukuk/eurobonds at a low rate of return.
There is a need to adjust policies as well as monitor prices accurately and check them through an administrative mechanism already in place (rather than through the tiger force with no legal standing), and take appropriate measures to check profiteering. In addition, it is about time the cabinet shifted its narrative away from placing the entire blame on previous administrations and/or other economic stakeholders and took a more informed measure of its own policies/failures.
While there has been an over-correction on the monetary side that has resulted in substantial reduction in the current account deficit that the government rightly cites as proof positive of the success of its economic policy, not much has been done on the fiscal side by way of consolidation. The high fiscal deficit is a matter of serious concern and unsustainable. It is expected that whenever the IMF programme restarts there will be focus on fiscal consolidation that would have a dampening effect on growth.
Copyright Business Recorder, 2020