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The SBP is running by design a policy of demand compression to shrink current account deficit. The SBP Governor is saying this to analyst community that bringing the CAD down is the main consideration and it will be done, no matter what it takes. The policy does not come without a cost of high inflation and increasing unemployment - some economists are terming this as stagflation; though short term policy blip cannot be termed stagflation.
The problem is that without bringing fiscal house in order, these efforts are to be short-lived and the cost to be paid will be too high. And government fiscal consolidation cannot be merely achieved by jacking up FBR revenues. After 18th amendment, fiscal expenditure is increasingly becoming domain of provinces and avenues of tax potential - such as agriculture income tax, property tax and GST on services are domain of provinces. Not much is being seen to improve provincial fiscal consolidation. Not much has been done to strengthen the Council of Common Interests.
Resolving the macroeconomic woes from the angle of curbing domestic demand - including shrinking private sector credit, and too much focus on federal tax revenues - compromising private entrepreneurship; in isolation such policies could be counterproductive. The balance is missing.
The demand slowdown has its own implications. For instance, higher interest rates and currency depreciation have significantly slowed down the automobile sector. The price of a car assembled in Pakistan - on average can be divided into three parts - government revenues, imported parts and local value addition. The policy is to slowdown imported part - but in the process government revenues (taxes) and local value addition (GDP growth) is compromised - one has to weigh the options that how much benefit of one third is essential to compromise the other two components.
And to fill up the government revenues, excise duty is being imposed on purchase of cars. First, someone should ask why to penalize buying cars as excise duty is supposed to be a penal tax. The other option is to evaluate that with auto demand to go down, overall revenues may come short. But again, the main focus is lowering car part imports.
Similar analogy can be made for many other sectors. Another example is dent in cement and steel consumption. These sectors' growth has remained closely linked to government development expenditure. Now, that is the only main expenditure- especially at federal level where the control is exercised. Lower construction material consumption is lowering some of the imports, but may be having heavier cost on tax revenues and employment loss.
The case of chemicals and other manufacturing sectors is not much different. And all these measures have an implication on retail and trade - biggest contributor to urban employment. And even exporting sectors are not insulated to the import compression, as data is suggesting that imports of exporting raw materials is falling - such as cotton, and that may lower the exporting revenues.
In a nutshell, import compression policies are compressing the overall trade value and volume. In modern day of world economies prosper on higher trade, and lowering trade is not going to help in employing youth. But one may say, that without lowering current account deficit, the balance of payment worries will continue.
Yes; that is correct, but in isolation, tightening policies, will keep the CAD low temporarily, and with economic recovery, CAD will shoot up again - the story of Pakistan for past 2-3 decades. The core of the problem is fiscal, without bringing fiscal discipline, CAD cannot be reduced sustainably.
And government has to think of reducing fiscal deficit beyond FBR revenues and curtailing development expenditure. There is no talk on bringing fiscal discipline in government machinery running expenditure. There is no effective debate is going on how to efficiently deploy government officers. There is nothing concrete happening on how devolve the redundant federal departments to provinces.
On the development side, cutting down pie is no solution. The natural progression is to have effective public private partnership. But with NAB's fear, no one is ready to touch it; and even in developed economies, PPP is vanishing. What alternate does the government have?
Time is running fast; one year is down and due to tightening amid accountability policies, the core issues are sidelined. Another year down the road with no meaningful change, the government will come in a tight spot. It is time to build government capacity and to bring bureaucracy in confidence and run policies to bring fiscal discipline. Without it short-term stability may bring medium to long-term pain.

Copyright Business Recorder, 2019

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