EDITORIAL: Prime Minister Imran Khan’s recent telethon telecast live on state and private television channels responding to public’s general queries was the fourth during his tenure – on 1 and 23 April 2020, the objective was to raise donations for Covid-19 affectees and on 28 March 2021 to address those eligible for Naya Pakistan Housing Scheme. The most recent telethon was marked not by the Prime Minister’s response but by the questions asked which largely focused on the rise in the general price level and his administration’s failure to deal with the inflationary spiral. One caller referred to his signature phrase “do not worry (ghabrana nahin)” and sarcastically sought his permission to begin to worry.
Inflation continues to erode the value of each rupee earned for the public sector employees, subjected to a wage freeze in the current year’s budget, and the private sector which has been unable to raise salaries at a rate commensurate with the rate of inflation for the past two years due to the contractionary monetary and fiscal policies (May 2019-March 2020) and the pandemic post-March 2020.
The Prime Minister’s response in all probability did not provide a comfort level as his narrative remained unchanged notably that the price hike is due to the ‘mafia’ who create artificial shortages to raise prices to generate windfall profits and that his administration is the first ever to proactively go against them – through the publication of damning inquiry reports with cases registered against the accused; he also sought assistance from the judiciary during the telethon to ensure that the guilty are held accountable. This explanation is ironic given that the head of his economic team who shaped this narrative, was unceremoniously dismissed as the Minister for Finance on 29 March 2021 for failing to check inflation. The dismissal indicates the Prime Minister’s awareness of factors other than the mantra of “mafia” being responsible for raising prices.
There is no doubt that the high discount rate as well as the rupee erosion contributed significantly to rising prices pre-pandemic; however, the discount rate was brought down to 7 percent on 27 June 2020 and remains unchanged to this day. Critics argue that the rate should be lower as an incentive to deal with the downswing of economic activity due to the third Covid-19 wave though this time around the rate is linked to core inflation (non-food and non-energy and consists of items not susceptible to discount rate manipulation), the usual practice before May 2019. In March 2021, core inflation was 6.3 percent which justifies the 7 percent discount rate though one would not be remiss in arguing that due to the ongoing pandemic the rate should have been lowered. The exchange rate too has stabilised in recent weeks and there is a perception that the “disorderly market conditions” prompting continued depreciation have been contained though the jury is out on whether the containment is attributable to external pressure.
Reliance on borrowing by the Ministry of Finance reached unprecedented heights during the past two years of the PTI administration which inherited domestic debt of 16.5 trillion rupees and by September 2020, two years later, it rose to 23.7 trillion rupees – a rise of 44 percent, which is certainly a highly inflationary policy. Converting the short-term to long-term debt was at a cost which in turn raised the country’s debt servicing payments. Foreign debt rose unchecked as well and with the suspension of the International Monetary Fund programme all multilateral/bilateral assistance for non-Covid-19-related measures shrank pending the resumption of the Fund programme (with staff-level agreement on second to fifth review reached on 16 February 2021). This compelled the economic managers to raise reliance on commercial borrowing from foreign banks which is at a high rate of return with a low amortization period as well as swaps mostly with China.
Shaukat Tarin, the newly-empowered economic decision-maker-designate, has already cited these other reasons for the persistent rise in inflation and one would hope that the Prime Minister takes a more hands on approach on the economy rather than relying on weekly briefings.
The Prime Minister’s plea to the courts to hold the guilty accountable brings to mind many judicial decisions which have led to the payment of hundreds of millions of dollars in penalties for abrogating contracts signed with foreign companies. But the PM is required to also turn his attention to strengthening the investigative and prosecuting branch of government which has lost many cases based on lack of expertise.
Last but not least, the Prime Minister must be aware by now that market imperfections are the norm not the exception in this country, and to deal with these imperfections requires a strengthened Competition Commission and a legislation that would ensure speedy resolution of trial proceedings.
Copyright Business Recorder, 2021