EDITORIAL: A former Finance Minister, Dr Hafiz A. Pasha, while addressing the members of Pakistan Industrial and Traders Association Front, stated that in the event that the ninth International Monetary Fund (IMF) review is not successful the country’s inflation could rise to 70 percent while in case of success inflation would rise by 35 percent.
This dire prognosis no doubt backed by an empirical study should raise the hackles of the country’s 70-plus cabinet members in general and the economic team in particular; however, while a rising concern is evident within cabinet members yet the sense of urgency to not only implement all prior conditions but reverse some policy decisions (that are in conflict with IMF conditions) taken since October 2022 appears to be missing to this day.
This raises two critical questions: (i) the damage to the economy given existing policies; and (ii) how long can the government delay the ninth review (scheduled on 3 November 2022) because of its inexplicable resistance to reverse post-October policy decisions and implement prior conditions identified in the late August 2022 seventh/eighth review documents?
It is imperative for the government to acknowledge the damage to the economy due to the post-October flawed policies that include a one billion dollar decline in remittance inflows (July-December 2022) relative to the comparable period of the year before as overseas Pakistanis opt to remit through hundi/hawala, offering around 40 plus rupees per dollar more than the official banking channels.
The interbank rate should technically be on offer to all imports allowed by the government but reports indicate that the offer is partial due to the dearth of foreign exchange reserves with the State Bank of Pakistan — 4.3 billion dollars on 6 January 2023 — and importers are being asked to procure the balance from the open market.
This is not only highly inflationary especially with respect to raw material imports but also dampens the growth rate that is indicated by a fall in the Large Scale Manufacturing (LSM) sector’s output by 3.58 percent July-November 2022 year on year.
There is little doubt that LSM growth would have declined further in December — a trend that persists in a new year as well. The delay in reaching an agreement with the Fund is fuelling negative perceptions about the national economy as is evident on the stock market which plunged by 3.47 percent on Tuesday, closing in the deep red.
The unfunded electricity subsidy to exporters is not only far away from the sanctity of any empirical evidence but is also opposed by the Fund that has termed it a regressive measure and yet it remains in place. Industries, including exporters, are expressing grave concerns over the rise in their input costs that makes them uncompetitive in the domestic market, leave alone internationally, and which no doubt accounts for a decline in LSM.
Low hanging fruit identified as imposing taxes that are easy to collect, read indirect taxes including customs/sales tax (with many maintaining that the proposed flood levy will be in this mode), withholding tax in the sales tax mode (though dishonestly credited to direct taxes) as well as petroleum levy being raised to the maximum 50 rupees per litre level on all allowed items is being proposed as the way forward to generate more revenue to meet the IMF’s prior actions.
This approach will fail to satisfy the IMF especially if the post-October decisions are not reversed and create considerable angst amongst the general public as the buck would as usual be passed onto the hapless consumers which, without implementing the agreed structural reforms, would imply no meaningful progress in dealing with the long-term prevailing sectoral issues as well as the multiple economic crises today.
So how much time does the government have before it must sign the ninth review? The incalculable damage to the economy is clearly continuing each day and there is ample evidence that the economic team is engaged in tactics similar to those effectively employed in 2013—17.
One would hope that better sense would prevail as not only is the economic situation today markedly different from 2017 (mainly due to sustained failure by successive administrations to implement structural reforms) but the Fund is no longer amenable to renegotiations — a stance that has been repeatedly made clear to the government — in 2021, August 2022 and now again for the pending ninth review.
While the foreign exchange reserves may be enough to defer the possibility of default to international creditors till early May/end June yet the continuing damage to the country’s productive sectors, which is fuelling inflation each week, needs urgent remedial measures that unless taken immediately may take a year if not more to reverse and may well plunge the country into civil unrest.
Copyright Business Recorder, 2023