Consumer price index (headline inflation) rose by 31.5 percent in February (up by 3.7 percentage points from January), core inflation by 17.1 percent year on year (urban) and 21.5 percent (rural) and sensitive price index (SPI) rose to a high of 41.5 percent during the week ending on 23 February 2023.
The July-February figures released by the Pakistan Bureau of Statistics indicate SPI rising by 29.21 percent (July-February 2022-23) against 17.83 percent in the comparable period the year before, CPI was at 26.19 percent against 10.52 percent, and wholesale price index rose by 33.68 percent during the first eight months of the current year against 212.06 percent in July-February 2021-22. Other key macroeconomic variables for January and February, almost certainly available with the Finance Division, have not been shared in the Outlook including non-tax revenue, Public Sector Development Programme, fiscal deficit and primary balance.
These statistics are extremely concerning as it sets the stage for a further erosion of the purchasing power of each rupee earned with: (i) a consequent ever rising debilitating impact on the growing number of vulnerable and unemployed (an outcome of the negative 3.7 percent large scale manufacturing growth July-December 2023 against 7.7 percent growth in the comparable period of 2021-22 – a rate projected to have further declined during January and February this year); additionally, inflation impacts considerably more on the lower to middle income groups as opposed to the rich raising concerns over possible widespread social unrest; and (ii) high inflation was used as a rationale to raise the discount rate to the historically high 20 percent on Thursday last.
This is a highly inflationary policy in Pakistan’s context as the government is by far the largest borrower and any raise in borrowing costs simply raises the mark-up, a component of current (non-development) expenditure, which is money pumped right back into the economy with little, if any, development/growth potential.
This argument is strengthened by data released for February 2023 in the monthly Finance Division publication titled Economic Update/Outlook which noted that fiscal deficit rose to 1683 billion rupees July-December 2022-23 against 1372 billion rupees in the comparable period of the year before (nearly 23 percent rise) with private sector credit declining from 806.8 billion rupees July to 28 February 2021-22 to 435 billion rupees in the comparable period of this year – an indicator that the PML-N never tires of insisting is the engine of growth.
Multiple factors account for the current high rates of inflation – both those due to flawed policies of the incumbent Finance Minister and harsh upfront conditions imposed by the International Monetary Fund (IMF) as a prelude to the ninth review success.
Those that can be laid at the doorstep of Ishaq Dar are the following: (i) controlling the interbank rupee rate without the reserves to intervene in the market thereby generating a grey market evident since October last year, finally abandoned on 26 January 2023 under IMF pressure. The grey market resurfaced in recent days due to lack of dollars in the market to clear the more than 5000 privately owned containers stacked at Karachi ports.
This inane policy has been more vigorously criticised by economists as its cost in terms of lost remittances has been 2 billion dollars during the first seven months of the current year; (ii) unfunded 110 billion rupees of electricity subsidy to exporters (a wealthy socio-income group) instead of the 33 million flood affected victims – an amount higher than the cost of the subsidy announced by the former Prime Minister Imran Khan on 28 February 2022 and implemented during his tenure; this policy has also been abandoned at IMF insistence effective 1 March; and (iii) Dar’s farm package envisaging more than a trillion rupees in credit without ensuring that it be made available to subsistence flood victim farmers envisages pumping money into the economy with output deferred till the crop is ready for the market – a policy that has inflationary implications. Reports indicate however that this has perhaps not been implemented as the Economic Update and Outlook February 2023 gives (provisional) figures of agriculture credit at 949.9 billion rupees July-Jan 2022-23 against 764 billion rupees in the comparable period of the year.
Factors fuelling inflation related to IMF conditions include: (i) a 3.39 rupee per unit surcharge of electricity that is permanent and does not end 30 June 2023 which has been announced; (ii) gas rates have already been upped by the government; (iii) maximising petroleum levy collections; (iv) a mini-budget envisaging 170 billion rupees in additional taxes also approved; (iv) a 20 percent discount rate; and (v) decontrolling the interbank rate and reverting back to the agreed and implemented market based exchange rate on 26 January 2023.
One prior condition that remains pending is of course the disbursement of pledges by friendly countries with only China releasing a loan of 700 million dollars last week and the Chinese Foreign Office spokesperson urged all to work together and play a constructive role in economic and social development of Pakistan blaming “radical fiscal policies of a certain developed country” on Thursday last the discount rate was raised and the rupee allowed to tumble the same day.
While domestic economists may be thankful to the Fund for reversal of all the flawed policies that Ishaq Dar had begun implementing soon after his return to the country on 26 September this year yet one would have hoped that the Fund had focused more on reforms that would have impacted less on the pocketbook of the poor and vulnerable and more on the rich.
These include: (i) ensuring that the onus of incompetence and corruption does not fall on the hapless electricity and gas consumers and that efforts must focus on improving governance; (ii) reliance on the low-hanging fruit in terms of taxes needs to end and indirect taxes must be eased out in favour of tax widening on the non-filers.
This must not include widening the differential in withholding tax levied in the sales tax mode on products and services between filers and no filers, which simply legitimizes the non-filers at the cost of the filers; (iii) slash current expenditure, which is rising in spite of the current economic impasse as indicated by the rise in the budget deficit and a decline in Public Sector Development Programme - from 288 to 166 billion rupees (a 43.8 percent decline) July-December 202-23 compared to the comparable period the year before.
Thus there is an emergent need for a revisit of key priorities through appropriate policies by both the Fund and the government. Sadly, the public is paying the price for foot dragging by the economic team leaders - Finance Minister Dar and Governor State Bank of Pakistan Jameel Ahmed - while blaming it on changing the goalposts by the Fund team as well as openly flouting policy measures that they personally agreed to, not their predecessors.
To conclude, the faux pas by the incumbent two economic team leaders would have led to their dismissal in any other country of the world however the largest party in the eleven-party coalition government appears to, inexplicably, retain confidence in their capacity while the others may be speculating on how many PML-N safe seats they can win by distancing themselves from these appalling policy decisions.
Copyright Business Recorder, 2023