EDITORIAL: The economy was and is still feared to get into a tailspin due to government’s inaction on crucial economic decisions. There’s a rupee slide while the market interest rates are rising. The foreign reserves are falling due to the retirement of debts, and fresh external support and financing are completely dry in the absence of the IMF’s (International Monetary Fund’s) nod.
There are some difficult steps (such as upward revision in the petroleum prices) that the government needs to take before the IMF starts giving some signs of comfort, which may facilitate the government to get funding from other sources even before completing the pending review.
However, the incumbent coalition government is in a tight spot. It is reluctant to take unpopular but compelling actions as it is not sure how long it will stay in office in the absence of a clear commitment from other stakeholders. Therefore, one can comprehend the political compulsions and inflationary consequences of ending energy subsidies and other IMF conditions.
However, some other decisions can be taken without losing political capital; and should be taken immediately to at least stabilise the PKR (if not appreciate) and reduce imports. Finally, there has been some decisions regarding the import of 38 categories of goods deemed non- essential and termed luxury goods. These have been banned.
Last week, this newspaper reported that the prime minister had asked the Ministry of Commerce (MoC) to develop a creative strategy to reduce imports and increase exports. This strategy must also be aimed at achieving greater import substitution. The second and third suggestions cannot yield results immediately. However, import-reduction steps would likely bear fruit in the next financial year.
Finance minister Miftah Ismail is said to have been forging a consensus within his own party on the way forward in the short period that he has been in office. Resultantly, there is confusion all around, which is further fuelling uncertainty. First, Ismail went to the IMF and returned with the same conditions, then he, along with the Prime Minister and other party members, went to London to seek guidance from PML-N supremo Nawaz Sharif and party’s financial ‘czar’.
This ongoing uncertainty and confusion as to who is the decision-maker needs to end. The government should calm frayed nerves in the markets and restore confidence without any further loss of time. Pakistan’s import bill is 65.5 billion dollars in 10MFY22, up by 46 percent — washing out all the gains made through rising exports and home remittances. The central bank policy tools are already working to help overcome the crisis. The currency is falling to check demand, and so are the raised interest rates. However, this would take time, and the slowdown would be even slower in the absence of critical fiscal actions.
There are numerous items where administrative and policy measures from the federal government can put quick brakes on the rising imports. The government should take these steps without any delay. One idea is to reduce energy consumption by closing down the commercial centres and shopping malls by 6pm. It will save electricity consumption and, more importantly, reduce the number of vehicles on roads and in streets.
Another key suggestion could be to promote the culture of working from home wherever possible. Then the government should increase the toll tax on motorways for private cars while abolishing it on buses to incentivize use of public transport. The government could also cap the headcount in public gatherings, etc., to 100 people. This would help in saving palm oil and other food imports.
The luxury items which cannot be imported and are smuggled should also be discouraged and possible smuggling of recently banned items checked. Vehicles top the list. The import in transport increased by 60 percent in 10FY22 to $3.7 billion. Pakistan imported $263 million worth of completely built units (CBUs) in the last 10 months. The government should ban or raise duties on cars above 1300cc to curb the import bill.
The more expensive a car is, the lower the localization, leading to a lesser impact on employment and middle-class consumers. Also, $1.8 billion worth of mobile phones were imported in 10MFY22. The government should ban or increase duties on CKDs and CBUs of mobile phones priced over $500 at the import level.
Furthermore, with the overall slowdown in these sectors and SBP’s policy actions, imports would ease across the board. Most notable is the energy bill, where pricing and administrative measures are critical.
The government should come up with a plan to give the right signal to the IMF, other lenders, and markets. That would help arrest the rupee slide. Then, perhaps PKR can appreciate a bit to help the central bank effectively address growing inflationary consequences and market speculation.
Copyright Business Recorder, 2022