EDITORIAL: A growth rate of between 4 to 5 percent remains the overarching objective of the de facto finance minister Shaukat Tarin since his appointment on 16 April 2021 – an objective that was clearly at odds with the contractionary monetary and fiscal policies supported by the previous economic team leaders and patently evident in the 6 May 2019 staff-level agreement signed with the International Monetary Fund (IMF), their suspension due to Covid-19, and the February 2021 second to fifth review which envisaged their re-execution as per documents uploaded on the Fund website. Claims by Tarin’s predecessor that economic stabilisation had been achieved last calendar year and the government would now focus on growth clearly did not reflect ground realities.
It is important to note that Tarin made pledges that had to be abandoned, particularly his claim that he would ensure that the upfront harsh contractionary policies proposed by the IMF would be renegotiated and phased out.
His critics point to his capitulation in allowing the rise in the base tariff by 1.39 rupees per unit, which he had virulently opposed initially, and the Federal Board of Revenue (FBR) has reportedly finalized an ordinance envisaging the end of 330 billion rupees exemptions but remains on hold because the Fund is no longer amenable to legislation through ordinances and insists on presentation of a bill in parliament.
Tarin’s recent admission that three other pending sixth review prior conditions will also be met, that includes granting autonomy to the State Bank of Pakistan, increase in power tariff (a rupees 1.39 per unit increase has already been made and the next raise will be effected in February 2022, according to Tarin) and an end to sales tax exemptions for which the government--true to its past--has readied an ordinance but would now be presented to parliament as a bill. This amply indicates not only the Fund’s leverage today but also its corollary: our lack of leverage.
Analysts argue that certain fault lines in our economic policies have been prioritizing growth not backed by higher exports but by higher consumption domestically which in turn has compromised the current account deficit – a trend that accounts for the fact that currently Pakistan is on its 23rd IMF programme in its 74-year history.
This claim is certainly backed by historic data, however, since last year remittances have surpassed all previous records, over 29 billion dollars in 2020-21 with the rising trend continuing till-date, and have emerged as the major contributor to ensuring that the current account is not under stress though the trade deficit is rising. Remittance inflows are mainly being used to fund the kitchen budgets of households, rising due to inflation, and/or procuring real estate that sadly was encouraged by the government’s recent pro-construction sector policies in spite of the fact that construction accounted for 2.6 percent of GDP in 2020-21 against only 2.5 percent in the year before.
This massive rise in remittances has not stayed our economic managers’ penchant for borrowing – today more than 50 percent of reserves of a little over 17 billion dollars are sourced to borrowing. In addition, the rupee is being allowed an almost free fall, reportedly as a trade-off not to raise the discount rate due to political compulsions, thereby contributing to not only a higher import bill resulting in a higher trade deficit but also raising the budget deficit as each rupee loss of value vis-a-vis the dollar raises debt servicing by 100 billion rupees.
There is therefore an urgent need for the government to engage in policies that focus not on higher outlay or expenditure, under the guise of social programmes focused on the poor and vulnerable as today less than 400 billion rupees out of the 8.4 trillion rupees is being allocated for Ehsaas programme, including the Ehsaas ration card, but on reducing its own expenditure which one hopes would ease pressure to borrow. The real fault line lies in continuing to borrow to fund the annual rise in government expenditure.
Copyright Business Recorder, 2021
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