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EDITORIAL: A meeting of Monetary and Fiscal Policies Coordinating Board (MFPCB) chaired by Finance Minister Shaukat Tarin has emphasised the importance of executing policies to achieve targets and overcome possible risks. The targets set in the budget presented to parliament on 11 June 2021, less than three months before, envisaged a Gross Domestic Product (GDP) growth rate of 5 percent (against 3.9 percent July-June 2020-21), inflation of 8.2 percent (against 9 percent last fiscal year), fiscal balance of negative 6.3 percent (against negative 7.1 percent last year expected to be higher when the revised targets are released later this month) and public debt of 81.8 percent (as opposed to 83.1 percent the year before expected to be higher than budgeted).

As the targets indicate, improvements were to be led by higher growth and growth in turn was to be led by three policy decisions. First, a discount rate stable at 7 percent which is lower than the Consumer Price Index of 8.4 percent in July 2021 to which the discount rate was pegged after the government went on an International Monetary Fund (IMF) programme effective July 2019 with prior conditions implemented from 12 May 2019 onward. Previous to the Fund programme the discount rate was pegged to core inflation, on average a couple of percentage points higher, which was 6.9 percent for July 2021 figures released by the Pakistan Bureau of Statistics (PBS) whose credibility to understate the politically damaging figure of inflation was patently evident in January 2021. However, economists point out that the 7 percent discount rate is above the 4.65 percent in India (inflation at 5.59 percent), 5 percent in Bangladesh (inflation at 5.36 percent) and 6.8 percent in Sri Lanka (raised on 18 August to contain inflation that rose to 5.7 percent). Thus the sustained high rate of inflation in Pakistan merits a rise in the discount rate; however, the State Bank of Pakistan (SBP) has defended the rate by citing supply-side issues and collusion in setting prices. Sensitive Price Index which consists of 51 essential commodities, by definition more applicable to the poor, rose by a whopping 13.3 percent year-on-year in the week ending 12 August 2021. Clearly, the discount rate therefore is not being used as an anti-inflation policy tool under the present circumstances.

Second, the rupee-dollar parity has worsened since May 2021, which determines the price in the domestic market of imported items of general use including petroleum and products (though the government is engaged in lowering its reliance on petroleum levy to minimise the impact on domestic rates which in turn will have implications on the budget deficit) and cooking oil. The SBP responsible for monitoring the implementation of the market-based exchange rate (defined as allowing the rupee to fluctuate within a band) has clearly not intervened in the market in spite of historically high foreign exchange reserves of which well over 50 percent are sourced to debt (debt equity including Roshan Digital Account and sukuk/eurobonds), prompting speculation that this policy may be the price that is being paid by the general public to ensure that productivity rise is sustained on the back of fiscal and monetary incentives.

The major onus of raising revenue by one trillion rupees from taxes in the current year is to be from GDP growth and inflation (649 billion rupees), and 242 billion rupees from enforcement measures, including third-party audit, instead of by the Federal Board of Revenue (FBR) officials, and more importantly, through sharing of data with National Database and Registration Authority (Nadra) through promulgation of an ordinance which is in the process of finalization; however, it is likely to be challenged in court of law.

The policy thrust of MFPCB appears to be to spend to fuel growth; however, one would have hoped that the government had also focused on reducing its current (as opposed to development) expenditure, which has obvious political ramifications, in conjunction with easing of the monetary and fiscal policies and perhaps fine-tuned the exchange rate policy to reduce imported inflation.

Copyright Business Recorder, 2021

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