EDITORIAL: Finance Minister Shaukat Tarin may direct officials of the ministry of finance to reevaluate the FY 2021-22 budget projections in light of two recent happenings – one in the realm of monetary policy and the other in fiscal policy that have significantly impacted the projections of the federal budget for the current fiscal year.
It appears that the central bank has clearly decided not to intervene in the foreign exchange market to defend the rupee that has declined from 153 in May 2021 to over 164 rupees to the dollar today – a 7 percent decline that amply reflects the sentiment generated by the growing current account deficit. The budget documents indicate that the projected parity was 153 rupees to the dollar as the basis for budget projections. The government’s economic team, however, contends and with justification that macroeconomic indicators are all positive – the current account deficit as per the 27 July 2021 Monetary Policy Statement is contained, foreign exchange reserves are over 17 billion dollars (projected to rise further by 2.77 billion dollars by 23 August 2021 as Pakistan’s share of the global liquidity booster by the International Monetary Fund is credited which, as per the Governor SBP will be used to fund imports which are rising due to the government’s pro-growth policies) and projected healthy commercial, official, portfolio and Foreign Direct Investment inflows. Independent economists argue that perhaps the rupee erosion may be to strengthen Pakistan’s position in the expected sixth review talks with the IMF next month.
Secondly, the government raised its reliance on petroleum levy as a revenue source to 610 billion rupees in the 2021-22 budget documents against revised estimates of 500 billion rupees last fiscal year – a whopping rise of 22 percent and consisting of around 10 percent of total projected Federal Board of Revenue (FBR) collections for the entire year of 5829 billion rupees. Be that as it may, the continued erosion of the rupee, the rising international price of oil, domestic inflationary pressures continuing unabated no doubt partly due to heavy borrowing by the government to fund its rising expenditure (8.4 percent inflation as per the latest Pakistan Bureau of Statistics data) and the ongoing fourth wave of the pandemic the government was forced to slash petroleum levy. While critics may dismiss this as allowing political considerations to dominate economic considerations, as evident during previous administrations, yet given the current external as well as internal factors the government had little option but to insulate the productive sectors and the general public from any further price escalation especially as empirical studies indicate that any upward revision of oil and products automatically leads to an across the board rise in prices.
A decline in the budgeted petroleum levy would obviously have implications on the budget deficit which in turn would also impact on inflation in the medium term. However, the ministry of finance can perhaps justify the reduction in petroleum levy collections by arguing that with the expected rise in imports, customs and federal excise tax, where applicable, would rise and make up the shortfall.
While macroeconomic policies are constantly adjusted by countries to take note of any evolving conditions yet it is relevant to note that Pakistan’s economy remains in a very fragile state and requires careful coordination between the fiscal and monetary policy strategists. However, such coordination has its own limitations particularly for fragile economies like ours. It is hoped that the fiscal deficit would be contained within levels that do not have a debilitating impact on the monetary policy.
Copyright Business Recorder, 2021
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