EDITORIAL: The eleven plus-party government is on track to extend Ramazan subsidies on at least five essential food items till the end of the fiscal year on 30 June 2022. These items are atta, ghee, sugar, rice and pulses.
This is without doubt premised on the rise in the Consumer Price Index (CPI) from 12.7 percent in March to 13.54 percent in April 2022, with core inflation (non-food and non-energy) rising from 8.9 percent in March to 9.1 percent in April 2022 and with the Wholesale Price Index (WPI) rising from 7.36 percent July-April last year to a whopping 22.89 percent in the current year (attributable largely to the eroding rupee value).
Given that economic indicators take some time to reflect policy changes, the rationale that the PML-N-led coalition government needs more time as it has been less than one month has merit, yet what is extremely disturbing is that like the PTI’s economic team, the current government has, to-date, allowed political considerations to prevail over economic compulsions, which is simply untenable for two broad reasons:
(i) the incumbent cabinet members were fully aware, as evidenced from their speeches at the time, of the prevailing economic quagmire that beset this country by 8 March when the vote of no-confidence was tabled against the then prime minister Imran Khan.
The major responsibility for persistently high inflation during the previous government’s tenure lay with the massive rise in current expenditure of which subsidies are a significant component. One would have hoped that upon assuming office on 12 April it had hit the ground running to reverse policies that were a source of major concern.
True, unlike newly-elected governments, the PML-led government does not have the luxury of a honeymoon period where politically unfeasible economic decisions can be implemented yet what is indefensible today is that while subsidies are being extended to combat inflation, yet the actual causes of inflation, that includes a historically high budget deficit, has not been tackled so far; and
(ii) severely contractionary monetary policy decision with respect to the discount rate — at 12.25 percent announced on 7 April 2022 when it was raised by 250 basis points — continues with a clear linkage to CPI instead of the more appropriate core inflation to ensure demand compression.
In addition, the eroding rupee value continues as well which accounts for a massive rise in the wholesale price index this year as against the year before. In other words, in spite of the severe contractionary policies being implemented by the State Bank of Pakistan (SBP), with implications on output in months to come unless some remedial measures are taken, inflation has continued to rise.
One would hope that the government is consciously aware of the fact that the next Monetary Policy Committee meeting is scheduled on 23 May by which time one would hope that the Governor SBP has been appointed instead of relying on an acting governor.
The government may be waiting to make key appointment and policy decisions till negotiations with the International Monetary Fund (IMF) on the seventh review begin, scheduled for early this week.
Those who argue that the IMF will be as inflexible as it was during the last weeks of the PTI administration in revisiting some of the agreed time-bound conditions/structural adjustments must remember that the situation has changed somewhat on two counts. First, Prime Minister Shehbaz Sharif’s visits to Saudi Arabia and the United Arab Emirates have reportedly been successful though the exact amount of support has not been revealed due to the well-known habitual reluctance of these countries to make it public knowledge.
His visits to Qatar and China are currently being planned and one would assume that support from friendly countries would be higher than what was available to the previous administration.
However, these commitments would reportedly be premised on successful culmination of the seventh review under the IMF programme. And second, the Fund has already indicated in a press release that the Pakistan authorities have requested “to extend the Extended Fund Facility arrangement through June 2023 as a signal of their commitment to address existing challenges and achieve the programme objectives.
” This, one would hope, would imply extending the time-bound harsh conditions by nine months as the stated scheduled last review of the EFF was in September this year as per the sixth review documents. There was no mention of a request to increase the EFF amount by 2 billion dollars in the statement though the government did claim that Pakistan had made such a request.
The government is required to dig in and begin to take some politically challenging decisions instead of extending packages that would fuel inflation further and which the country cannot afford. This newspaper has repeatedly warned that there is no roof for complacency on the country’s economy. We need to draw lessons from Sri Lanka’s economic crisis.
Copyright Business Recorder, 2022