The Economist terms the reversal of the fuel price hike as "Economic Blasphemy" while the Financial Times and the IMF communiqué have also been critical over this ad-hoc, impulsive decision. Yet, politics-over-economics seems to be the order of the day.
The fiscal strain from this decision is estimated at around Rs 5 billion for January, and it could be higher in the coming months if PM Gilani holds back the fuel price rise again in the face of increasing global oil prices. Apart from these fiscal blues, the dictation from the PM office seriously threatens the independence of institutions like Ogra.
Sadly, the people, even the suited-and-booted ones working in the corporate environment appear to support the PM's decision. But people have short memories. They must not forget that one of the chief reasons cited for the worst-ever economic crisis of 2008 was the failure to pass the impact of the then soaring international oil prices.
The decision at that time was to fatten the vote bank for the Musharraf-led PML-Q government in the then upcoming elections, while this time around it is to keep the Zardari-led coalition government afloat.
So while the general public may have embraced the decision of the oil price reversal, they are ignorant of the worse economic consequences of living beyond means. The role of the media in this regard, therefore, should be to create awareness among the masses rather than to applaud populist decisions, or to label the fuel price hike as a 'petrol bomb'.
A similar case in hand is the failure to divert gas from the CNG to industry, whose under-capacity production is not only increasing unemployment but also fuelling imported inflation. The decision to halt the monthly increase of electricity tariff to meet the cost and revenue gap is going to hit government kitty by Rs 25 billion per month.
On the other hand, on the demands of its coalition partner from Sindh, the PPP-led government has postponed the implementation of the RGST to the next-year's budget, whereas the voices on the one-time flood-tax for flood reconstruction have also died down.
In such circumstances, the fiscal deficit may hover around 7-7.5 percent of GDP or Rs 1,200-1,250 billion against the revised target of 4.7 percent of GDP or Rs 800 billion. The strain of this excessive Rs 400-450 billion is likely to fall on domestic banking sources.
This will require the central bank to print more money for the government to meet its fiscal needs and that will fuel inflation. Remember, in FY08, the government printed in excess of Rs 650 billion while inflation was at a 35-year high. Moreover, the government's reliance on commercial banks and power shortage will make it difficult for the 10,000 persons turning 18 everyday in Pakistan to find employment.
Persistent double-digit inflation and higher unemployment will hurt the average citizen more than the benefit of lower petroleum prices, availability of CNG and lower power tariffs. Yet, the economic managers are yet not able to convince parliamentarians on this simple economic phenomenon.
A better answer to fiscal problems is to have an equitable taxation system and rationalisation of government expenditures. The media in this regard is playing the right role by creating awareness among the masses and convincing the politicians to tax agricultural income and other sectors that are largely out of the tax ambit.
But it is easier said than done. Reportedly, in a recent meeting at the party headquarters of one of PPP's coalition partners in Karachi, both parties and the tax authorities discussed for hours the resolution of RGST, flood-tax and agricultural income tax.
And just when an amicable solution was almost drafted, according to sources, the meeting concluded on a basic argument put forward by the parties that they needed to keep their voters happy and retain the vote bank in their respective rural and urban areas.
Unfortunately, they don't realise that the rationalisation of taxation is for the benefit of all Pakistanis, whether they are residing in urban or rural areas.
MONEY AGGREGATES:
The government retired Rs 180 billion in the last week of the first half of the fiscal year to reduce its borrowing from the central bank to below the hundred-billion rupees mark. The government received $710 million from the US in the head of the pending coalition support fund which helped Net Foreign Assets to increase by Rs 62 billion.
This foreign inflow, along with a similar amount of borrowing from commercial banks and transfer of the profits of SBP, paved way for the government to window dress its balance sheet at the half-year end.
However, a likely slippage in fiscal deficit from target to the tune of Rs 400-450 billion will likely keep pressure on note printing in the second half.
The private sector rejoiced the higher liquidity in the system as its credit increased by a hefty Rs 50 billion to take the half-year toll at Rs 163 billion versus Rs 109 billion in the similar period last year.
With a welcome decline of Rs 42 billion in the currency in circulation and a hefty Rs 137 billion increase in demand and time liabilities, the overall money supply rose by 1.63 percent or Rs 94 billion.
In the half-year, nominal money supply (M2) increased by 9.53 percent or Rs 551 billion much better than 5.84 percent (Rs 300 billion) in the corresponding period last year. However, with an 8.3 percent surge in consumer price index in July-December 10, the real money supply increase remained marginal. (Feedback at ali.khizar@br-mail.com).
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KEY MONETARY AGGREGATES AS ON JAN 1
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Rs (mn)
1-Jan 24-Dec Change
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Currency in Circulation 219,490 262,151 (42,661)
Total Demand & Time Deposits 329,951 192,938 137,013
Broad Money (M2) 550,788 456,392 94,396
NFA 131,501 69,238 62,263
NDA 419,285 387,153 32,132
Net Government Borrowing 291,344 415,795 (124,451)
Borrowing for budgetary support 338,653 459,037 (120,384)
from SBP 92,400 272,324 (179,924)
from scheduled banks 246,253 186,713 59,540
Commodity operation (49,913) (44,601) (5,312)
Credit to non-govt sector 179,455 129,432 50,023
to private sector 162,953 113,356 49,597
to PSEs 15,686 15,237 449
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Source: SBP
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