EDITORIAL: The Khan administration’s defence against the proposed no-confidence motion is to raise an extremely pertinent query: can any other political party guarantee a decline in the prices of petroleum and its products with the current rise in their international prices and the harsh upfront conditions under the ongoing International Monetary Fund (IMF) programme which is critical at the present state of the economy? The obvious answer is ‘no’.
However, this does not mean that there are no other options than those being implemented at present, which include: (i) raising utility tariffs with the objective of achieving full-cost recovery, an IMF condition which, from an economic prospective, is fully supportable; no administration, including the incumbent one, has been able to implement structural reforms that would mitigate the need to pass on energy sector inefficiencies to the consumers — a failure that requires raising base tariffs which are irreversible; (ii) the agreement with the IMF to raise petroleum levy by 4 rupees per litre per month till the upper limit of 30 rupees per litre is achieved; (iii) withdrawal of exemptions which is another source of price hike.
The government claims that the recent bill amounting to the withdrawal of 343 billion rupees exemptions is largely refundable and therefore revenue neutral or in other words will not increase revenue; however, this claim has been challenged not only by the January 2022 Monetary Policy Statement issued by the State Bank of Pakistan that refers to this as fiscal consolidation but also in the IMF’s sixth review report uploaded on its website; (iv) the failure to take timely decisions, including importing LNG to enable uninterrupted supply to fertilizer plants as well as other productive units; (v) routinely berating the “mafia”, read setting price through collusion which is not legally permissible, and yet unable to institute appropriate administrative measures to deal with the problem; and (vi) heavy reliance on borrowing externally for not only meeting the country’s external financial obligations (mainly those incurred by previous administrations as well as those incurred by the present government) but also for budget support and it is here that the new dispensation can make a difference.
The basic flaw in the government’s economic policies till date has been three-fold. First, the inordinate rise in current expenditure — from 4.3 trillion rupees in 2017-18 to over 7.5 trillion rupees budgeted for the current year. The government as per the Fund report has pledged to limit the increase in spending to 1.1 percent of GDP above the FY2021 out-turn through rationalizing non-priority current spending and streamlining non-targeted subsidies and recalibrating investment spending in line with realistic execution rates.
This pledge is likely to be compromised due to strengthening political considerations as well as the deviation from the budgeted GDP growth from what is actually achieved by the end of the fiscal year. Be that as it may, the rise in current expenditure is highly inflationary and reflects not only the failure to implement structural reforms notably in the pension system, reforms that have been identified but remain unimplemented, but also in failing to convince/compel all recipients of current expenditure to make meaningful sacrifices for two to three years.
Second, within current expenditure there has been a massive rise in markup costs reflecting an unprecedented rise in both domestic (from 16.5 trillion rupees inherited by this government to over 27 trillion rupees today) and foreign borrowing (from 95 billion dollars to over 130 billion dollars today). Borrowing to meet current expenditure which is not backed by a rise in output is also highly inflationary.
And finally, instead of cutting its own current expenditure the focus remains on raising revenue — through tax collections (while retaining the heavy reliance on indirect taxes accounting for over 62 percent of total collections in the current year, whose incidence on the poor is greater than on the rich) and privatisation for which the environment is simply not conducive at present. In addition, envisaged subsidies including for three staples, to cost an unbudgeted 120 billion rupees, with the jury still out on whether launching cheap credit for the poor and vulnerable (including housing) and for small and medium enterprises would fuel growth or fail as in the past.
While the rise in administered prices (utilities) and petroleum levy may be dictated by external factors, yet the government of the day has considerable leverage to adjust policies that can contain inflation and reduce the yawning gap on the fiscal side, which is also a contributor to inflation but it is simply not engaging in.
Copyright Business Recorder, 2022