EDITORIAL: Advisor to the Prime Minister Shaukat Tarin’s focus since his induction into the Cabinet on 16 April 2021 has been to minimize the impact of the agreement reached between the PTI administration and the International Monetary Fund (IMF) in February 2021 on the hapless general public.
Details of the agreement titled second to the fifth review are available on the IMF website since April 2021 which include: a raise in the base electricity tariff with the objective of achieving full cost recovery, elimination of inflows into the stock of circular debt to be followed by a steady decline in the stock, the state-owned entities (SOEs) to be restructured and/or privatised to minimize their burden on the exchequer, widening of the tax net by eliminating exemptions and ensuring those outside the tax net engaged in conspicuous consumption, including taking expensive holidays abroad as well as incurring huge monthly electricity bills be brought into the net.
Today the situation remains dire on the economic front with none of the agreed structural reforms having been implemented which together with the changing geopolitical considerations has left Pakistan unable to negotiate a more phased approach to implementing the extremely harsh “prior” reforms/conditions.
To put it baldly, Tarin’s engagement with the Fund merely delayed the completion of the sixth review scheduled for 4 June 2021 – a contention reflected by the government raising the base electricity rate in October (though the regulator has urged the government to consider raising it by more than the Fund stipulated 1.39 rupees per unit by suggesting 1.68 rupees per unit to ensure that the subsidised rates be applicable to those who consume between 0 to 300 instead of 0-200 units per month as in the past), an ordinance is ready for submission by the Federal Board of Revenue removing exemptions and reducing the number of tax slabs that would result in raising of tax rates for some, amounting to 330 billion rupees and last but not least even though the Prime Minister has disallowed raising POL products’ rates yet the notification does not specify (i) either the date of applicability as in the past notifications but notes ‘till further orders’ fuelling fears that the government may be compelled to raise petroleum levy as and when the Fund programme is restored; and (ii) does not detail a reduction in all the components that determine the price of petroleum and products.
There are three extremely concerning aspects of the economic policies of the incumbent government. First, the Prime Minister and his economic team remain focused on reducing the recalcitrant inflation with subsidies and cash disbursements without understanding a basic economic principle: any increase in the money supply will raise and not reduce inflation. And, considering that the Fund is reportedly insisting on harsh monetary and fiscal policies, economic activity would be stifled perhaps not as much as in the first year of the programme when growth was projected at 1.5 percent (pre-Covid-19) but certainly not as high as 5 percent as optimistically forecast by Tarin.
And secondly, it is relevant to note that the Khan administration raised budgeted current expenditure from 5.1 trillion rupees in 2018-19 it inherited to 8.4 trillion rupees in the current year – a rise of nearly 65 percent. This is also a highly inflationary policy and it is little wonder that the government has been unable to contain the budget deficit to sustainable levels during its ongoing tenure.
Tarin in one of his interactions with the media, referred to the focus of the Fund on the primary deficit, i.e., sans debt servicing payments. This is becoming a very serious issue for the simple reason that the Khan administration’s reliance on borrowing has reached new heights - domestic borrowing rose from 16.5 trillion rupees in 2017-18 to over 26 trillion rupees today while external borrowing rose from 95 billion dollars to 125 billion dollars today with more than 5 billion dollars already used for budget support as opposed to repayment of past debt as claimed. More than fifty percent of our foreign exchange reserves are debt-based (debt equity, commercial borrowing and bilateral/multilateral support) – a situation exacerbated by delayed imports/procurement of wheat, sugar, and RLNG second year running.
One economically simple but politically extremely challenging decision would be to reach a consensus within all the recipients of current expenditure (barring the interest payable on debt though disturbingly the government engaged in transferring short-term into long-term debt in 2019 when the discount rate was prohibitively high at 13.25 percent) to tighten their belt and sacrifice for the next two years. If the total outlay can be curtailed to even the same level as last year at 6.58 trillion rupees as stipulated in the budget 2021-22, it would be a step in the right direction.
The PTI administration is into its fourth year of its five-year tenure and the recommendations compiled by the forty plus task forces (power, oil and gas, revenue, SOEs, etc.) are gathering dust like numerous studies during previous governments. While the country appreciated the Prime Minister’s austerity measures, including sale of water buffaloes, cars and not serving tea and biscuits, yet these are an infinitesimally small percentage of the total budget. It is time to undertake reforms and be ruthless against the army of cabinet members most of whom do not have much to show by way of performance.
This editorial first appeared in Business Recorder
