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The most important variable to control through monetary tightening, exchange rate under valuation and other demand curing measures is current account deficit. Within it, in the short to medium term, the head to control is import bill. Thus, import compression policies are in action - since our economy is highly dependent on imports for raw materials, fuel, essential food items and machinery - the import compression is not possible without serious dent on economic growth. Job loss, and high inflation are adverse consequences.
The demand compression is visible and reportedly imports in July came under $4 billion after almost three years. The adverse consequence is negative growth in LSM and in turn, SME manufacturers associated with it, and trade and retail sectors. The policy is not sustainable, and is no long-term solution.
The problem is age-old and so is the solution. Run an import compression policy for couple of years, and eventually the current account deficit will come low or may marginally become positive. And in days close to election, let the doves dominate - by running expansionary monetary and fiscal policies; and it would give a bull run for a year or two before, the balance of payment crisis hits back.
The only real economic change PTI can bring is to move away from this boom bust cycle. That is easier said than done. The core of the economic problem is fiscal. The gap between revenues and expenditure results in fiscal deficit and that creates excess domestic demand and to meet that, foreign savings have to plug in - resulting in a higher current account deficit.
On the fiscal side, the issue raised is revenues - be it tax or non-tax. The debate on curtailing expenses - administrative and due to other inefficiencies never really moved beyond mere talk of privatizing PSEs and reducing energy circular debt. No action in the past many years has been taken to actually reduce these. And there is no debate on how to curtail government administrative expenses or how to better utilised government departments and employees, and how to efficiently allocate development budgets.
Whenever we are in an IMF programme, an effort to document the economy and to expand the tax base takes place, and at the end, indirect taxes go up and direct taxes on existing tax base increase disproportionately. That in turn lowers the ease of doing business and increases the cost of doing business - especially in formal manufacturing sectors. That erodes the competitiveness further and increases incentives to do business in informal segment. In the process, exports growth is compromised and fiscal tax revenues become skewed to a few sectors.
History is repeating itself. The talks of change are much more this time, but actual actions on ground are far and few. The FBR revenue targets are too stiff - advance collection, low refunds and compromises with trade community may be the eventual result. The one difference is FATF compliance - a compulsion; and not mutually exclusive to documentation. This brings some hope that tax net may actually expand now.
However, the core of the fiscal problem is yet to be addressed. The problem is of energy-related circular debt and growing capacity payments. In a year or two when macroeconomic stability may be attained, it will be short lived - relative to those in past years, due to fast growing energy related capacity payments.
Small examples narrate the resolve or lack of it. Imports are down to $4 billion at the cost of loss in employment and falling GDP, growth amidst high inflation and growing fiscal debt servicing. But the inefficiencies and incompetency in the energy chain continue. The minister in press briefs emotionally claim about good governance by reducing thefts - but that is just 20 percent of circular debt problem, 80 percent is yet to be touched.
In the last month or two, extra RLNG and furnace oil have been imported because the gurus in energy chain could not ascertain the demand and supply from alternate sources. As a result, the energy import bill is burdened for no good reason, and in power production, cheap fuel option (coal) has to be replaced by expensive RLNG and FO for the time being. The energy cost is to increase which is to push power tariff up. And on top due to 'take and pay' policy for RLNG terminal, delay in offloading gas is resulting in demurrages - another cost on fiscal and balance of payment.
Coordinated efforts are found wanting, and the lack of focus on energy chain is making macroeconomic recovery even more painful. It is about time the PM and power hubs in the country took energy challenge seriously and actually focus on its resolution, i.e., to work on 80 percent of circular debt issue.

Copyright Business Recorder, 2019


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