Firdous Ashiq Awan, Special Assistant to the Prime Minister on Information, in her routine briefing to the media on cabinet decisions revealed that Prime Minister Imran Khan has directed the relevant ministries to help stabilise prices of essentials and ensure their availability in the country’s markets; he has also convened a meeting of chief ministers and chief secretaries at the end of the week to discuss measures to activate price control committees at grassroot level. inflation
This directive, simplistically, presupposes that inflation is the outcome of profiteers and hoarders and not the result of the government’s own economic policies. While one must not understate the impact of the unscrupulous traders operating in this country who overcharge the hapless public, a fact most visible during religious events, particularly the annual raise in prices of items that are in use in the month of Ramazan during iftaar and sehr, yet the fact remains that the major contributor to the current high inflation rate is the government’s own policies.
First off, the Prime Minister would be well advised to review the Extended Fund Facility loan documents uploaded on the International Monetary Fund (IMF) website signed off by his appointed economic team leaders notably the Advisor to the Prime Minister on Finance Hafeez Sheikh, and Governor State Bank of Pakistan Reza Baqir projecting an inflation rate of 13 percent for the current year. The budget documents for 2019-20 concur with this projection. This rate does not reflect the contribution of profiteers and hoarders as their actual contribution can simply not be quantified. What the projected inflation rate does reflect is the outcome of the three policy decisions that the IMF insisted on as a condition of the EFF but which the Pakistani economic team over-corrected are as follows: (i) the IMF insisted on the adoption of a market-based exchange rate; however, the government went for an overkill and by June had undervalued the rupee by 10 percent. This led to import compression which could be supported as it reduced the current account deficit but ignored was the impact on domestic productivity reliant on import of raw materials and semi-finished products. Unemployment as a consequence is estimated at over 50,000; (ii) the discount rate be raised by 150 basis points, the IMF insisted, which was implemented in May this year. However, the rise of an additional 100 basis points in July is baffling and again was an overkill choking off domestic economic activity and leading to lay-offs; and (iii) the budget itself envisaged no reduction in expenditure, so no austerity measures irrespective of what was claimed by the Prime Minister and his cabinet; while the unrealistic revenue target as well as the objective of the newly-appointed Chairman Federal Board of Revenue to enhance documentation, fully supported by Business Recorder, has not yet borne any dividends because he tried to do too much in too little time. This approach has choked off activity in the concerned sectors/subsectors, particularly the real estate sector and SMEs. Again layoffs are being witnessed.
To add to this disturbing set of policies is the fact that the economic managers, aware that the revenue target was unrealistic to start off with, are now relying on privatisation proceeds to meet budget deficit. One would urge the Prime Minister to be fully engaged with this process as previous administrations’ forays into privatisation are fraught with legal challenges both within and outside the country.
It would be advisable if the political leadership would also engage with independent economists and market players besides the sources in his cabinet to assess the state of the economy, to ascertain the reasons for sustained poor performance and possible out of the box solutions.
(This news/article originally appeared in Business Recorder on October 17th, 2019)