Economic despondency

EDITORIAL: The Sensitive Price Indicator (SPI) for the week ending 29 September 2022 year on year was estimated at 29.8 percent, a considerable decline from the week ending 15 September rise of 40.58 percent.

The Large Scale Manufacturing (LSM) output decreased by 1.4 percent however the data is applicable to July, prior to the realization of the extent of the flood damage, and hence the figures for August and September are expected to be worse especially for those industries reliant on agriculture for their basic inputs particularly textile sector reliant on raw cotton, and sugar industry reliant on sugarcane output.

The decline in LSM output in July is therefore a reflection of the severely contractionary fiscal and monetary policy measures as part of the then ongoing negotiations with the International Monetary Fund for the release of the next tranche – negotiations that were successful leading to the 1.16 billion dollar disbursement in September.

This data raises an obvious question: why is the SPI declining when expansion in the output is minimal? The decline in the SPI is mainly attributable to the decline in the prices of tomato, onion and cooking oil (three major ingredients for our cooking) as well as in the rates of electricity and LPG. And while wheat flour price rose by 22.47 percent, a Pakistani staple, yet overall the prices of vegetables and fruits were stabilised or declined due to improved availability.

LSM, however, declined mainly because of a massive reduction in cement output, an outcome of the lapse of the pro-construction policies supported by the Khan administration, that included a tax amnesty scheme, which accounts for cement witnessing a negative 41.9 percent growth rate in July while fertilizer sector suffered negative 13.6 percent growth, a rate that would be further compromised due to the damage to crops by the floods, while petroleum products suffered a negative 5.2 percent growth as the international prices of the products peaked in July.

Garments witnessed a 48.5 percent growth in July followed by Iron and Steel at 13.2 percent – subsectors that are expected to have suffered a considerable loss of output subsequent to not only the floods but also the depreciation of the rupee and last but not least the fiscal and monetary policy conditions agreed by Pakistan with the IMF that are even more contractionary then the one’s negotiated by the previous government for the success of the sixth review and the subsequent tranche release in February this year.

The question is which way forward would be the most appropriate to ensure that the vulnerable and the disadvantaged are able to provide food for their families while the lower to middle income earners are not pushed down into the ranks of the poor? First off, the newly-appointed economic team leaders need to revisit the debilitating conditions agreed with the Fund under the seventh/eighth review in terms of taxes imposed on fuel (petroleum levy and sales tax), and electricity; existing reliance on withholding taxes that are in the sales tax mode, a regressive tax, must be abandoned in favour of taxing traders (wholesalers and retailers) profits, a tax that governments have invariably shied away from for entirely political considerations.

The wholesale/retail sector rose by 33 percent in 2021-22 against the year before as per the Economic Survey – as opposed to 22.32 percent increase in 2020-21 against 2019-20. It is time that this fastest growing sector is made to pay its due share in the country’s taxes.

In addition, the most taxed sectors in this country are the productive sectors, (LSM) and the salaried because of the ease of collection from these two sources; however, the consequent impact on other macroeconomic indicators, including GDP, exports and foreign reserves, has been ignored and disturbingly met by borrowing from both the domestic and foreign markets which has become a source of serious concern today. That thrust continues to prevail today and one would hope that the government revisits this policy without any further loss of time.

The flood damage has been successfully internationalized and one hopes that this is used by the economic team to renegotiate those conditions with the Fund that envisage an unbearable burden on the common man and focus on those that are targeting the rich and at the same time slash current budgeted expenditure.

Copyright Business Recorder, 2022