EDITORIAL: The State of the Economy Report published by the State Bank of Pakistan acknowledged the growth rate for 2021-22 at 6 percent, a major accomplishment repeatedly cited by the previous administration, but emphasised the need for structural reforms if the boom-bust recurring cycle is to be avoided.
Two observations are in order. First, the structural reforms constitute a wide range of politically extremely challenging decisions including a tight monetary and fiscal policy as well as power sector and Federal Board of Revenue (FBR) reforms with subsidies targeted only to the poor and vulnerable.
The general public may well consider that the existing policy rate of 16 percent, ever-rising reliance on regressive indirect taxes, including petroleum levy, whose incidence on the poor is greater than on the rich, and the rising cost of electricity with the objective of full cost recovery (though increasingly perceived as passing on the sector’s inefficiencies) support the unfair and unsustainable elite capture of all resources; yet without even further tightening of monetary and fiscal policies the ninth International Monetary Fund (IMF) review is unlikely to conclude in the near future that will, in turn, delay the inflow of other pledged assistance from friendly countries.
And second and very disturbing, the government continues its flawed policy of not keeping the rupee rate flexible which accounts for depleting foreign exchange reserves, currently at 6.12 billion dollars that at today’s international prices would cover not more than four to five weeks of imports, rising imported inflation and last but not least, a decline in remittance inflows that is already apparent.
The policy decision to extend unfunded 100 billion rupee subsidy on electricity to exporters in October this year has raised IMF concerns and domestic speculation that the Fund would be content if the government raises taxes/revenue to offset the decline due to import contraction by administrative and exchange measures and thereby keep the budget deficit sustainable may not be an option as the Fund is insistent on the country meeting the agreed time-bound quantitative conditions and structural reforms as agreed in the seventh/eighth reviews.
What is disturbing is scaling down the growth projection for the current year to 3 to 4 percent range and noting it as a growth rate that has been “moderated considerably”. This projection is at odds with the October 2022 World Bank projection of 2 percent. However, the growth rate budgeted for the current year, pre-floods, was 5 percent which implies a maximum 2 percent and minimum one percent decline from the SBP projection that can hardly be defined as considerable. Besides the budgeted 5 percent was challenged as being unrealistic by Business Recorder on the expectation that the IMF would require ever tighter monetary and fiscal policies in subsequent reviews.
Today the country is beset with not only massive devastation caused by the floods that has effected 33 million people, thereby necessitating external support but the government is clearly dragging its feet with respect to the implementation of the agreed reforms and quantitative time-bound benchmarks.
And this is happening at a time when the government has not bothered to create some leverage with the Fund by: (i) massively slashing current expenditure through seeking voluntary cuts by all recipient sectors, including civilian and military establishments, subsidies and implementing reforms starting with pension reforms, power sector reforms, and tax sector reforms; (ii) improve governance of all state-owned entities requiring massive budgetary injections each year through initiating devolution of all subjects to the provinces that were agreed over twelve years ago and remain pending to this day; and (iii) granted that the country is scheduled to have elections no later than 10 months yet there is a need to desist from disbursing development funds to parliamentarians which the treasury, federal and provincial, can ill-afford at the present moment in time.
In spite of these dire economic straits the same policies that generated much angst in previous years continue which, to put it in a nutshell, focus on keeping the rupee strengthened that is negatively impacting the flow of home remittances through the banking channels and also timely remittances of export proceeds and extending subsidies to sectors instead of the needy.
The government would be well advised to acknowledge that the existing policies are exacerbating the divide between the haves and the have-nots especially in the aftermath of the floods and while the assistance to the flood victims through the Benazir Income Support Programme was effective yet that assistance was for rescue and immediate relief and more is required to meet the needs of many who remain away from home to this day. Urgent assistance is therefore required or else the prospect of social unrest looms large on the horizon.
The agriculture package envisaging over a trillion rupees in loans may be hijacked by those who can put up collateral if past precedence is anything to go by which the flood victims cannot provide. To reiterate yet again the economic policies today are unacceptable to our external supporters, multilaterals and friendly countries, though the current economic team leaders continue to rely almost exclusively on acquiring pledged external loans while ignoring the fact that disbursement is linked to the success of the ninth IMF review.
Copyright Business Recorder, 2022
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