What must be a source of serious concern to the political government is the 14.67 percent raise in CPI in January 2020 compared to 12.6 percent in December 2019 while it was 8.3 percent in April 2019 when the Prime Minister changed his economic team leaders both in the Finance Ministry and the State Bank of Pakistan leading to a staff-level agreement with the International Monetary Fund on 12 May. There is no doubt that part of the inflationary pressures can be sourced to IMF conditionalities that include: (i) governance reforms in the utilities sector, which remain pending, while insistence on full cost recovery has implied passing on the cost of poor governance to consumers through higher tariffs; (ii) a discount rate of 13.25 percent which has raised the cost of borrowing by the productive sectors (barring the recent additional injection of 200 billion rupees to all the export sectors at the subsidised rate of 5 to 6 percent) which has not yet arrested the decline in large-scale manufacturing (LSM) sector, with implications for downstream industries operating as small to medium enterprises. This in turn has reduced the Federal Board of Revenue's (FBR's) capacity to meet the unrealistic fiscal target of 5.5 trillion rupees, revised downward to 5.23 trillion rupees, heavily reliant on industry; (iii) the undervalued rupee, to the tune of 4.2 percent as of November 2019, has made imports more expensive reducing customs collections, exacerbated by corruption/smuggling across our porous borders with Afghanistan while POL products' imports as inputs for the utility sectors and transport sector are more expensive relative to other regional countries making our products uncompetitive in the international market; and last but not least (iv) the federal and provincial governments' administrative failure to check profiteering and other market imperfections while the Economic Coordination Committee (ECC) of the Cabinet has taken ill-informed decisions relating to exports and/or imports of wheat and sugar has further fuelled inflationary pressures.
The Prime Minister is convinced that the price rise is mainly if not entirely attributable to profiteering/smuggling activities carried out by extremely influential mafias operating in several key sectors including items in which Pakistan is largely self-sufficient; notably, wheat flour and sugar. While there is no doubt that this is indeed the case, however, he needs to also acknowledge that many of the influential members of these mafias are said to be enjoying support of senior PTI leaders as well as members of his cabinet, at the federal and provincial level, requiring him to look into the matter.
The Prime Minister must also accept the fact that contractionary fiscal and monetary policies, being implemented since May 2019, are not directly linked to controlling inflation in Pakistan given that our economy is not well documented, cartels are politically powerful and engaged in profiteering, there is considerable smuggling across thousands of miles of porous borders and there is no data integrity (the recent wheat price data released by PBS claiming 40 rupee per kg is patently flawed) accounting for flawed Economic Coordination Committee decisions (wheat imports allowed recently would land in Pakistan at a time when the Sindh wheat crop is in the market changing the supply position is another flawed decision).
Copyright Business Recorder, 2020