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EDITORIAL: The year on year Sensitive Price Index (SPI) for the week ending 18 August 2022 rose to 42.31 percent from the 37.69 percent the week before — an index which assesses the price movements of 51 essential items from 50 markets in 17 cities across the country.

Significantly, the items include imported products particularly petrol, cooking oil and diesel with their prices linked to not only their international price but also to the rupee-dollar parity (with the rupee largely strengthening since end-July), electricity and petrol rates also linked to the agreement with the International Monetary Fund (IMF) and domestic produced items particularly vegetables, fruit and meat whose prices are seasonally adjusted but are also a function of their transport costs which, in turn, are determined by the price of petrol.

The argument by the incumbent government is that it is adhering to the agreement with the IMF signed off by the PTI (Pakistan Tehreek-e-Insaf) administration which was not up for renegotiation, read phasing out the politically unpopular decisions. That the Fund has been unwilling to renegotiate the agreed and signed terms of the Extended Fund Facility (EFF) programme was first brought to public notice when Shaukat Tarin, who was appointed as the country’s Finance Minister mid-April 2021, pledged renegotiations with a view to phasing out of the harsh upfront conditions.

Tarin failed and eventually signed off on the sixth review end January 2022. His successor Miftah Ismail followed suit though given the appallingly low foreign exchange reserves he did not have the luxury of time and capitulated with the Fund uploading on 13 July on its website that the staff-level agreement on the seventh/eighth reviews had been reached. Conspicuously, the actual date of the Board directors meeting that would approve the tranche release was not announced till the government had upped the price of petrol by 6.72 rupees per litre effective 16 August.

However, instead of placing the onus of a prohibitively high inflation entirely on external factors, though they are major contributors, the fact remains that the government’s policies leave a lot to be desired as it continues to subordinate the economy to politics despite its constant mantra that it is focused on bringing the economy back from the brink of collapse while paying a steep political price.

It is relevant to state three observations that are in order and one would hope that the eleven-party cabinet revisits its policies. First, of course is the one trillion rupee increase in expenditure in the current year’s budget when resources are so very tight. Sacrifice by all the recipients as well as reforms in the pension system are required on an emergent basis.

Second, and equally important, the reliance on indirect taxes whose impact on the poor is greater than on the rich continues; and what is extremely disturbing is the fact that direct tax collections on traders envisaged in the finance bill have been withdrawn due to political pressure and to compensate for the revenue loss as a result thereof, higher sales taxes on some other items, an indirect tax, imposed.

It is also relevant to note that petroleum levy, budgeted to generate a whopping 750 billion rupees this year, is an indirect tax. Had the government launched reforms in the tax structure to make them equitable, fair and non-anomalous one would have been compelled to agree that bold and politically challenging reforms are under way.

And finally, the state-owned entities (SOEs) continue to require large budgetary injections and in some cases to meet even their salary bills. The most indebted sector and indeed the most poorly performing sector is the energy sector with a circular debt as high as 2.3 trillion rupees today.

Yes the major responsibility rests with the contracts signed with the Independent Power Producers (IPPs), and with favourable revised agreements signed with IPPs other than those under the umbrella of the China Pakistan Economic Corridor (CPEC), there is an emergent need for the government to try to convince the Chinese companies to extend some relief. In addition, despite tall claims that appointments would be on merit, the past three administrations, including the incumbent, have failed to turn any SOE around.

There is, therefore, a compelling need to revisit some flawed policies that may well have adverse political implications that would result in erosion of political capital but would reduce the inflationary pressure. Without any structural reforms our long-term economic outlook is unlikely to improve.

Copyright Business Recorder, 2022


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