The Khan administration maintains that a change in government will not reverse the rise in price of any single item – be it in the category of administered prices (including the heavily taxed electricity/gas/petroleum sectors) and/or others (cooking oil/wheat/sugar) as inflation is not only a global phenomenon sourced to the pandemic but also because there is zero likelihood of phasing out harsh upfront conditions under the ongoing International Monetary Fund (IMF) programme given that Finance Minister Shaukat Tarin tried and failed to renegotiate conditions agreed by his predecessor Dr Hafeez Sheikh and the incumbent State Bank of Pakistan Governor Dr Reza Baqir.
There is much truth in this assertion however this presupposes that policies cannot be adjusted as there is need for the IMF’s remaining three tranches (with disbursement of an estimated 2124 million Special Drawing Rights). The Fund has made it amply clear that it will not give much room to backtrack the time bound implementation of structural reforms, based on its experience in the previous twenty-two programmes where implementation of politically challenging reforms was either abandoned before programme’s scheduled end and/or reversed as soon as the programme ended.
While there are signs that the incumbent government may follow past precedence with elections looming on the horizon yet a key question is whether, within these significant constraints, some bargaining leverage can be generated in the very short term say by the seventh or the eight review – leverage that is critical for a democratically-elected government.
It is evident that Pakistan needs to be on the Fund programme to ensure cheaper credit from multilaterals as well bilaterals, and acquire debt equity (issuing Eurobonds/sukuk) at cheaper rates than would otherwise be possible as being on a Fund programme lends a comfort level to lenders that the country is not going to abandon its reform agenda.
And sadly this aspect of the Fund programme, notably the focus on primary deficit which does not take account of mark-up and borrowing levels, rather than on the budget deficit which does, has not been Tarin’s focus or his predecessor’s.
The primary source of dwindling public support is inflation and the Khan administration’s claim that inflation is a global phenomenon is not finding much traction. While the public may not be focused on global inflation yet economists point to the fact that inflation in Pakistan is double that in other countries for example inflation in the United Kingdom reached a thirty-year high of 5.5 percent, in the US a high of 7.4 percent and in Pakistan in January 2022 headline inflation (Consumer Price Index) was at a high of nearly 13 percent, and in the week ending 10 February 2022 sensitive price index (51 items of general use) was 18.58 percent with the lowest expenditure group quintile (that includes the recipients of the Benazir Income Support Programme) facing 20.25 percent which explains why the sixth review report of the IMF urges the government to “applying the mechanism for periodic inflation updates of all BISP cash transfers.”
If a comparison is made with the regional countries it is noteworthy that inflation was 6 percent in India, and 6 percent in Bangladesh. Sri Lankan inflation was 14 percent though similar factors as in Pakistan were in evidence with (i) an economy heavily dependent on foreign credit; (ii) high domestic borrowing; and (iii) depreciating currency, and (iv) rising public wages. And more recently like in Sri Lanka Pakistan is experiencing a drop in remittance inflows.
In addition, the rise in prices of staples today is partly attributed to failure to take timely policy decisions, for example there have been reported delays in procuring critical items that are in short supply including LNG, wheat, and fertilizer as well as failure to ensure that administrative measures are effectively in place to ensure no, or minimal, profiteering along the supply chain - the district administration to deal with profiteers on the ground as well as the Competition Commission of Pakistan. It is fairly evident that previous administrations dealt with these illegal market forces more successfully.
There was agreement between the Pakistan authorities and IMF staff, as per the sixth review that “the current market determined exchange rate remains appropriate to act as a shock absorber and the foreign exchange interventions should be limited to avoid disorderly market conditions.”
This objective, notably of using the exchange rate as a shock absorber (one may assume to absorb the shock associated with a deteriorating balance of payment position – the primary reason for Pakistan going on Fund programmes, past and present, was not the primary objective of past exchange rate policies as the rupee value was manipulated to understate borrowing costs and/or to protect domestic consumers from imported inflation.
True that Ishaq Dar during the last PML-N tenure manipulated the rupee to a level of strength that was well beyond what was economically feasible yet allowing the exchange rate to act as a shock absorber may well be going to the other extreme. Be that as it may, the rupee’s depreciation has not stalled the widening of the trade deficit in recent weeks nor arrested the decline in remittance inflows.
The government has raised administered prices (electricity and petroleum and products) considerably as a prior condition for the sixth IMF review and pledged further raises as well as agreed to raise revenue through raising the petroleum levy to its maximum limit of 30 rupees per litre. The claim that the recent raise in petroleum prices is merely a pass-through of the rise in the international price of petroleum and products is not accurate as 33 percent rise in petrol prices effective from 16 February 2022 is due to a rise in petroleum levy.
So what can be done to increase leverage with the Fund and shift the focus from primary to budget deficit? Two flawed policies need to be revisited on an urgent basis. First the scale of expenditure, particularly current expenditure, envisaged in the current budget is 7.5 trillion rupees, up from the 2017-18 figure of 4.3 trillion rupees which accounts for the unprecedented rise in domestic borrowing (from 16.5 trillion rupees inherited by the Khan administration to over 27 trillion rupees today) and external borrowing (from 95.2 billion dollars on the eve of Imran Khan taking oath as prime minister to over 130 billion dollars today).
Considerable sacrifices from all the recipients of current expenditure are required and at the same time reforms in the pension system as well as irregularities in the procurement process must be plugged. True previous administrations did not show any inclination or capacity to undertake these reforms but the situation is becoming dire with each passing year.
Needless to add, a reduction in expenditure would give leverage to our negotiators with the Fund in the next three reviews by not only reducing our heavy reliance on foreign borrowing (and roll-over of massive debt from friendly countries) but also in terms of time- bound implementation of some other harsh conditions.
And secondly, there is an urgent need to reform the (i) tax system from its existing heavy reliance on indirect taxes towards direct taxes (accounting for only 37.4 percent this year against 39.7 percent in 2017-18) so that the heavy reliance on petroleum and products as a revenue source declines and therefore their contribution to inflation is minimized; and (ii) the power sector by removing the onus of achieving full cost recovery, an IMF condition, onto the consumers through higher tariffs instead of on the sector/subsector performance.
Sadly, none of the previous administrations, nor the incumbent, have tackled these long standing issues which have steadily exacerbated their stranglehold on our economy. This may lend credence to the claim by the Khan administration that things will not change with a change in government. One of course hopes for reforms through appropriate policy changes but this requires political will together with considerable economic expertise – conditions necessary to create leverage which have been missing in the past and are lacking today.
Copyright Business Recorder, 2022