EDITORIAL: Waning economic sentiment pervades the markets. This week, the rupee (PKR) depreciated against the US dollar (USD), the stock market was in red while the money market yields soared. Earlier, in the previous week, all of these indicators were buoyant while markets were tanking in the last few days of the PTI (Pakistan Tehrik-e-Insaf) government. There were perception-based speculative activities taking place — both ways. In the end, it was the economic fundamentals that dictated — be it the stock or the money markets.
The political instability, historically, extracts an economic cost in Pakistan. In the previous regime, the policy of sticky nominal PKR continued in 2017 while the current account (C/A) was slipping. Since PML-N (Pakistan Muslim League-Nawaz) government was politically weak, its economic managers continued with their convoluted monetary and exchange rate policies to the chagrin of the economists.
The last year of the Musharraf era was no different either, with him being weakened politically, in the quest for the election victory, his government (Pakistan Muslim League-Quaid) did not pass the impact of higher oil prices on to consumers — and the consequent fiscal slippages had a direct bearing on the current account.
The PTI government, too, did no different. The government went back to the IMF (International Monetary Fund) in February and committed on fiscal consolidation for which passing the energy prices increase on to consumer was imperative. But the fear of the no-confidence vote pushed PTI to adopt a populous approach, reducing the petroleum and electricity prices and freezing them.
The IMF obviously didn’t like the U-turn. That reduced the confidence of other lenders on Pakistan’s external account solvency, and the SBP (State Bank of Pakistan) reserves started falling as the rollover of debts slowed down and the price of raising fresh debt from international markets skyrocketed. Now the new government must take tough decisions for fiscal consolidation. They are taking their (not so) sweet time, and probably are pressurized by PTI that has been attracting huge crowds at its anti-government rallies.
Politics has to be set aside for economic survival. The macroeconomic imbalances are on the fiscal side. The policies — monetary and exchange rate adjustments — at SBP are doing right. These are to be complimented by fiscal adjustments to bring in the much-needed stability. Otherwise, the southbound movement of the PKR is inevitable and that has its own consequences.
The government has no other choice but to increase petroleum prices without any further loss of time. This can be done in phases; but the first move should be visible immediately. The government needs to think to support the marginalized segments of society to dilute the impact of direct and indirect inflation due to pass on of the energy prices.
This blanket subsidy is suicidal. It has to be targeted. There used to be a ration card system until the 1980s in Pakistan. In India, it is still in vogue. The country needs to get back into a similar regime where certain amount of fuel, electricity, and essential food items are provided to deserving households at discounted rates.
Once the country attains the fiscal discipline only then things fall in the right direction. The C/A deficit is already slowing down; but higher fiscal slippage is challenging sustainability. However, the persistently high commodity prices are keeping the import bill high while the reserves are drying out.
For the short- to medium-term, administrative measures to be taken will slow down the economy. Pakistan Business Council (PBC) recently gave some suggestions to the new government. One is to do reduce the energy consumption to lower the import bill.
They have come up with the suggestion of working from home, early closure of commercial centres and wedding halls along with rationing of fuel for private vehicles. This newspaper, which has been underscoring the need for conserving energy for several months, fully agrees with this suggestion. The government should revisit its policy of six-day working week and make concerted efforts aimed at slowing down economy till commodity prices take a breather.
Copyright Business Recorder, 2022
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