EDITORIAL: The final remarks of the monthly economic update and outlook uploaded on the Ministry of Finance website bafflingly maintains that “overall economic outlook shows an optimistic picture of the economic performance in the coming months” – a view that may reflect the incumbent government’s confidence in the newly-appointed economic team leaders though three policy decisions taken in October undermine the validity of this confidence: (i) on 6 October Ishaq Dar announced that 19.99 rupee per unit of electricity would be provided to five export-oriented sectors (inclusive of taxes) against 40 rupees available to non-vulnerable domestic consumers that would cost the taxpayers an additional around 110- billion rupees.
This continues in spite of an implicit warning by Azour, Director of Middle East and Central Asia Department International Monetary Fund on 13 October that “subsidy that is targeted to support certain items has proved not very effective.
I would say it has proved to be very regressive;” (ii) on 10 October, the Monetary Policy Committee of State Bank of Pakistan decided to keep the discount rate at 15 percent when the Consumer Price Index calculated for September was 10 percent higher at 25.1 percent with core inflation at 14.9 percent.
This discrepancy implies a negative real interest rate – again a policy decision that is not supported by the IMF; and (iii) the focus of the IMF is to increase social spending especially at a time when inflation is prohibitively high and while the budgeted outlay for Benazir Income Support Programme (BSIP) has been raised to 360 billion rupees in the current year (against 246 billion rupees last year) the devastating floods necessitate a further rise in social spending and a commensurate decline in current expenditure which includes subsidies to exporters.
The state of the economy is dire and this is reflected in all the macroeconomic data in the Update that includes a 47.1 percent decline in foreign direct investment July-September 2022-23 against the comparable period of the year before, a decline in reserves from 17 billion dollars 26 October 2021 to a mere 8.8 billion dollars on the same date in the current year, primary balance (excluding debt servicing costs) rose from negative 37 billion rupees July August 2021 to negative 90 billion rupees in the comparable period of this year, and a rise in fiscal deficit (a highly inflationary policy) from 462 billion rupees July-August 2021 to 672 billion rupees (July-August 2022).
With respect to fiscal operations the September figures (no doubt available by end October) were not included with sceptics likely to argue that these were deliberately not included as they would show an even worse trend.
The report further argues that “for the future path of inflation, the exchange rate is of utmost importance,” and inexplicably refers to “a virtuous inflation-exchange rate cycle.” Here too there is concern that the government is ignoring IMF’s sound economic advice notably that “more prominence should be given to exchange rate flexibility as a means to address the balance of payment pressures rather than to administrative and exchange measures.”
It is important to note that the CPI does reflect a measure of imported inflation, that includes not only the rise in the international price of our major import items notably oil and products but also the prevalent rupee-dollar parity.
However, core inflation was estimated at 14.9 percent year-on-year in October and this is a reflection of previous flawed policies that account for an unsustainable high budget deficit which disturbingly continue to this day.
The Update further argues that “inflation, also a manageable current account deficit and guaranteed financing of this deficit by healthy financial inflows are required,” - healthy financial inflows referring no doubt to not only rollover of loans by friendly countries but also acquiring additional loans of over 4 billion dollars or a considerable rise in the country’s indebtedness; and maintains that “when markets get convinced about these prospects speculative bubbles in the exchange rate would be highly unlikely.”
While gains by the rupee were significant during October after 8 banks were identified as being responsible for raising the parity to 240 (in a report that was prepared on the instructions of the Prime Minister) yet today the rupee has stabilised to around 222 to the dollar and without any intervention the rate is unlikely to come down further.
Interventions are opposed by the IMF and it must be borne in mind that any delay in the successful completion of the ninth review would not only entail the cessation of the envisaged “healthy financial inflows” by friendly countries who have directly pledged to the Fund but also further lower our rating that would make the cost of borrowing from foreign commercial banks and/or through issuance of Sukuk/Eurobonds prohibitively expensive.
It is, however, important to note that so far in the current financial year economic policies are neither out-of-the-box nor geared towards the poor with the thrust remaining on the elite.
Even the country’s tax system is geared towards regressive taxes whose insigence is greater on the poor relative to the rich. It is, therefore, time to distance ourselves from past flawed policies and forge ahead if development of the country and the poor is a primary target.
Copyright Business Recorder, 2022
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