EDITORIAL: The Khan administration’s overarching objective to help the poor and vulnerable cannot be faulted and has been fully supported by the public as well as international lending agencies, including the International Monetary Fund (IMF). However, two factors that are seemingly ignored need careful consideration.
First, total outlay on Benazir Income Support Programme, inclusive of cash disbursements, is 250 billion rupees for the current year, with another 120 billion rupees envisaged for ration cards for purchase of three staple items for all those with income up to 50,000 rupees per month and 1.6 trillion rupees over three years (two years beyond the tenure of the government) as credit to the small and medium enterprises (SMEs) as well as vulnerable groups in rural and urban areas to promote productivity.
Till such a time as social spending/credit translates into higher output (with the jury still out whether this objective will be achieved as there is a disconnect between SMEs and large-scale manufacturing sector in Pakistan with the latter reliant on imports for its inputs rather than on the SMEs as in other countries) the amount of cash disbursements/credit will initially increase money supply which, without a rise in output, is a highly inflationary policy.
Thus to continue to extend subsidies/credit at zero interest as a means to deal with poverty will require ever-rising outlay on such programmes, which the government can ill afford due to its limited fiscal space. Secondly, and of equal concern, is the fact that the target group as per BISP constitutes 40 percent of the total population of 216.4 million people, a significantly large number, with more and more pushed below the poverty line as prices continue to rise unabated.
There are at present three policy options in use that are actually raising inflation. The State Bank of Pakistan (SBP) has been using the exchange rate as a shock absorber in the words of the IMF sixth review report to contain the widening trade deficit, however, today the rupee-dollar parity is a primary cause of inflation especially as the international price of oil (accounting for over a quarter of our import bill) is rising, and projected to rise further after Russian President Putin’s announcement recognising two breakaway regions of Ukraine — Donetsk and Luhansk — and his decision to send Russian troops to their assistance.
The fact that imports of petroleum and products are a major source of revenue for the government (petroleum levy pledged to rise to up to 30 rupees per litre, sales tax and customs duties) account for their significant contribution to inflation through a rise in transport costs of goods and people.
Thus, inflation is projected to rise still further. Secondly, the SBP has already raised the discount rate, a contractionary policy, which is negatively impacting on productivity of LSM sector which, with the rising money supply in circulation, is also an inflationary policy.
There is no doubt that if the government decides to slash budgeted current expenditure of 7.5 trillion rupees, with spending on insulating the impact of inflation on the poor and vulnerable accounting for less than 400 billion rupees, inflation would ease.
Unfortunately, though the government as per the sixth review indicated its intent to: (i) rely on market sources (external borrowing and domestic banking system) to finance the budget, whilst seeking to stretch maturities to reduce rollover risks — which accounts for over 120 trillion rupee rise in domestic debt and more than 35 billion dollars in external debt during the past three years, which has fuelled money supply in circulation; (ii) additional tax policy reforms seeking to create fiscal space though with the budget envisaging 37.4 percent from direct (ability to pay) taxes and the rest from indirect taxes whose incidence on the poor is greater than on the rich structural reforms clearly remain pending; and (iii) the onus of meeting full cost recovery especially in the poorly performing energy sector continues to rest on consumers for major sector inefficiencies. There is a need to shift the onus on the subsectors to achieve this objective.
To conclude, there is a need for considerable policy revision on multiple counts, a revision that requires changes based on sound economic principles, if containing and controlling inflation is truly a priority.
Copyright Business Recorder, 2022
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