ISLAMABAD: Inflation could skyrocket to 19 percent against the current 13 percent in the short term if subsidies on petroleum products are entirely withdrawn. This was stated by former finance minister Dr Hafiz Pasha while speaking as a guest at the Aaj News show “Paisa Bolta Hai” with Anjum Ibrahim.
Dr Pasha referred to the recent increase in petroleum prices as “better late than never”, adding that only half the subsidies have been eliminated and the government is still required to disburse Rs 50 billion unfunded subsidies per month.
He contended that the subsidy reduction was almost certainly due to the insistence of International Monetary Fund (IMF) during talks in Doha, and added that the Fund may have agreed to phasing out of the subsidies.
He said that the government needs to increase prices by another 27 percent at the current oil price rate. Arguing against the subsidies, Dr Pasha said they are not targeted and hence benefit the rich with gas-guzzling cars more than someone on a motorbike. He referred to 2008 when the international price of oil had risen to $140 per barrel (while currently they are at $115 per barrel), which compelled the newly inducted PPP-led government at the time to raise diesel prices by 40 to 50 percent.
When the budget for 2021-22 was presented oil prices were around $60 per barrel, which are almost double today, Dr Pasha pointed out. The prices in India and Bangladesh are 60 percent and 30 percent higher, respectively, in dollar terms compared to Pakistan.
The petroleum import bill is expected to reach $20 billion this year and with foreign exchange reserves down, the economic imperative is to end the subsidies, he maintained. The former finance minister further stated that the unfunded subsidies had to go irrespective of which party was in government, adding that in the short term inflation could reach 19 percent against the current 13 percent if all subsidies are withdrawn.
Dr Pasha said there are several areas that require immediate attention, including massive losses incurred by the State Owned Enterprises with the power sector leading the way, prioritising the Public Sector Development Programme (PSDP), and salary and pension reforms, to reduce budget deficit and ensure continuation of the IMF programme.
The state-owned entities are placing a burden of around Rs 1,000 billion on the exchequer every year with the power sector incurring the highest losses. The PSDP is unwieldy and has expanded to 1,040 projects at a total cost of Rs 8,000 billion. The government with severely limited resources can spend no more than Rs 400-500 billion per annum which results in project delays of three to 12 years and escalates the cost of the projects.
It is imperative that Ahsan Iqbal supports only those projects that are likely to be completed in the next fiscal year. In addition, the 18th constitution amendment devolved several subjects to the provincial governments; however, this has yet to be implemented. Instead, the federal government has further expanded and there are 40 divisions in the federal government which need to be reduced by half.
The expenditure on pensions (civil and military) is Rs 1,100 billion and pension reforms are urgently needed to overcome this challenge, said Dr Pasha, adding that retirement age needs to be brought down to 63 years and employee contribution should be entertained. Sadly, salaries of government employees are rising speedily and have risen more than the private sector in the last five years; this needs to stop as there is simply no fiscal space for such generosity.
Debt burden has increased to more than Rs 50,000 billion and Pakistan will pay around Rs 3,200 billion interest this year which is expected to increase sharply next year. The expenditure is rising and in the current fiscal year the budget deficit is expected to be Rs 5,000 billion, over 9 percent of the GDP. If the government is to move with the IMF, it will have to reduce the deficit to 6 percent of GDP or in actual terms to bring it down by Rs 1,000-1,200 billion, which is going to present a massive challenge.
The SBP has utilised one tool, raising the discount rate to 13.75 percent, and it is feared that this may further be increased to 15 percent in the coming months to reduce the trade deficit. Hence, steps need to be taken to reduce imports as the financing requirements are projected to be $30 billion next year.
Referring to the government’s ban on luxury items that would save the country hardly $2 to $3 billion per annum, Dr Pasha highlighted one problem. “We should have talked to the World Trade Organisation which is opposed to the ban on imports.”
He further proposed formulation of a comprehensive import policy. “The import bill may reach $75 to $80 billion this year which needs to be brought down to $65 billion,” he said. Conceding that the previous government had done some great work on its Ehsaas programme, Dr Pasha advised the incumbent government to come up with targeted subsidies to help the lower strata of society.
In response to a question, he said that the current finance minister is qualified and remained on this position in the past as well, but he frequently changes his statements. On returning from Doha, the minister said that they would not raise the petroleum prices, but later increased it. Currently it seems that there are two finance ministers, one sitting in London and the other one sitting in Islamabad; the two have different thinking.
The government, he said, needs to have closed-door debates. The position of a finance minister is very sensitive and he should talk carefully, adding that officially only the finance minister should do the talking on issues of importance.
Copyright Business Recorder, 2022