EDITORIAL: Federal Finance Minister Shaukat Tarin during the Monday meeting of the National Assembly Standing Committee on Finance stated that the government is preparing a policy to shift from stabilisation mode to economic growth which would necessitate a request to the International Monetary Fund (IMF) to provide relief in some conditions such as a raise in electricity tariffs. This is precisely what Secretary Finance at the time, Younas Dagha, independent economists, as well as Business Recorder were strongly advocating that the government must do, but to no avail.
Reforms, critics of the agreement argued, were critical to turning the economy around especially pertaining to the power sector as well as the tax structure and administration; however, their implementation in a short span of time would cause severe hardship on the people of this country that would fritter away Imran Khan’s considerable political capital in a short span of time. Reports indicate that this has indeed happened and responsibility rests with flawed policies with respect to agreeing to upfront harsh conditions in the: (i) fiscal domain inclusive of raising the tax targets on the unrealistic assumption that those who had successfully resisted all past attempts to bring them into the tax net would be brought into the net in one year; the focus on primary deficit (minus interest and debt repayments as and when due) that allowed for massive borrowing – external debt rose by 23 billion dollars (17 billion dollars to pay interest and repay past loans when due) and at least 5 billion dollars due to failure to curtail current expenditure while domestic debt rose from 16.5 trillion rupees to a whopping 25 trillion rupees this year; and last but not least from the perspective of the general public increases in prices that were placed entirely at the doorstep of the mafia (read collusive behaviour) and supply side issues without taking note of the steady increase in utility prices as agreed with the Fund due to failure to improve the performance of the power and tax sectors, leading to an unsustainable budget deficit; and (ii) monetary policy domain with a raise in the discount rate by linking it to the consumer price index (though previously the practice was to link it to core inflation – non-food and non-energy items which are not sensitive to the discount rate without any justification to this day) and a massive depreciation of the rupee that not only raised input costs of raw materials thereby affecting output but also raised prices though it did curtail the 20 billion dollar current account deficit. Business Recorder has been urging the State Bank of Pakistan (SBP) to undertake a study to determine whether the rupee is now undervalued as feared in the market to which the response has been that it is a long-term process that also takes account of demographics; however, the SBP team needs reminding that the IMF did undertake a study during its previous programme and concluded at the time that the rupee was overvalued from 5 to 25 percent.
The foregoing indicates that to switch from stabilisation to the growth mode is not only within the purview of the Minister of Finance but also the SBP. In other words, if the Minister for Finance begins to implement expansionary policies with a view to fuelling growth and if the SBP continues contractionary policies then the impact may well neutralize the outcome. Stabilisation of the current account deficit was achieved mainly through a severe contractionary monetary policy while today the discount rate is at 7 percent, against the 13.25 percent earlier, yet this too is on the high side in the regional context as India’s rate is 4.25 percent, Bangladesh’s 4 percent, China’s 2.25 percent. Shaukat Tarin explained to the standing committee that he would request the Fund to phase out the raise in tariffs – the schedule having been agreed by the two previous signatories on behalf of the government of Pakistan. Tarin added that raising tariffs only increases theft and pledged to reduce the circular debt - the over-arching IMF objective - through other means which one hopes would include sector efficiencies.
Tarin also indicated that he would increase the outlay on development spending in next year’s budget, a major factor in growth in Pakistan though administration after administration has slashed this expenditure item to bring down the deficit to a sustainable level or in times of a Fund programme to a more acceptable level. The question is where would the government choose to spend the development budget? The Fund released a working paper on Pakistan’s spending needs to achieve the sustainable development goals target by 2030: 5.7 percent of GDP must be spent on education (against 3.9 percent in 2018 to 9.6 percent by 2030), 6 percent of GDP on health care (against 3 percent currently being spent on health care), 2 percent of GDP on water and sanitation, invest 24.5 billion dollars on electricity access and 76 billion dollars on road network. One would have to wait for the budget document to see whether these targets are met; however, social sector investment typically begin to give returns in the long-term and one would assume that given the current state of the economy attaining the SDG goals would take a back seat.
Copyright Business Recorder, 2021
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