Technocracy on a slippery slope – Journal

PTI management woke up to difficult realities when food prices rose more than 20% due to shortages, market manipulation and smuggling. Prime Minister Imran Khan acknowledged that the recent rise in prices for essential goods and their shortage were the result of government neglect.

Khan says his government is trying to put in place a system to anticipate such a situation. The crux of the problem in official policy making is that it depends more on a reactive attitude and less on a proactive attitude. Problems can turn into serious problems or crises because there are winners and generally losers who are unorganized and uninfluential in a given set of policies. To resolve the problems thus created, reactive policies are only implemented in the event of a popular or sectoral crisis.

No strategy creates a win-win situation for all, widens the space for the common good, and to use a phrase from the book Justice by the American philosopher Michael J. Sandel promotes shared democratic citizenship. For such a transformation, a proactive policy is necessary.

Cost-driven inflation has benefited and hurt many people, including government and banks. Most of the increase in tax revenue comes from rising commodity prices and indirect taxes.

As fiscal risks continue to haunt the country's economic team after 18 months of intense effort, the situation is entering the political arena

The high discount rate and the depreciation of the rupee, contributing to cost inflation, helped the banks to earn money. The key rate at 13.25pc is linked to headline inflation and not to core inflation at 8pc as was normal practice. The exorbitant cost of debt service on government loans is paid for by taxpayers' money. A large part of public revenue is also absorbed by loss-making public enterprises. With increasing budgetary risks, the Ministry of Finance (MoF) has indicated that cuts in development spending cannot be ruled out.

Struck by the high cost of inputs, diminished consumer purchasing power and underutilized industrial capacity, producers and suppliers are trying to pass the costs on to domestic consumers. They also benefit from the rise in prices of existing stocks.

Although the country may not have made enough dollars, a huge devaluation has helped the export industries earn more rupees thanks to increased volumes. But cost-driven inflation and falling domestic demand would also have closed some factories, creating unemployment.

Most affected by double-digit inflation coupled with the alarming rise in food prices are blue-collar workers, peasants, those in fixed income groups like the wage-earning class, the growing number unemployed and those whose wages have been cut due to the economic downturn in real and nominal terms. Only a small fraction of those thus affected on a large scale is compensated by social safety nets.

The impoverishment of the vast majority of consumers leads to a reduction in domestic demand and a delay in economic recovery. There is no indication at this time that the recovery could be driven by investment or by export in the immediate future.

Speaking at a dinner he hosted in honor of President Dr Arif Alvi and his wife, chairman of the Nishat group, Mian Mohammad Mansha, said: the world business must have a supportive environment, free from harassment, intimidation and bureaucratic bottlenecks, so that they can concentrate and devote all their efforts to generating economic activities without which neither growth can be achieved nor jobs can be created for our young people. Many development experts believe that long-term economic growth is best served by maintaining price stability.

No strategy creates a win-win situation for all, widens the space for
the common good
and promotes shared democratic citizenship

In the past, as a rule, economists in Pakistan used to say that a budget deficit above 5-6pc was starting to hurt the economy. The latest projection from the MoF is that the current fiscal year will end with a budget deficit of 7.5% compared to previous forecasts of 7.1%. The mid-term review of the 2019-2020 budget identified major budgetary risks for the stabilization program, including a substantial drop in tax revenues, unexpected levels of public debt and the financing of the budget deficit.

In the United States, inflation levels of 1 to 2 pc are generally considered acceptable and an inflation rate higher than 3 pc represents a dangerous area which could lead to a devaluation of the dollar. With a double-digit inflation rate in Pakistan, it is no wonder that the MoF views unexpected exchange rate volatility as a threat to the economy.

The PTI government has taken or is considering a series of measures to control rising prices and generate economic activity, some of which will cause a pause in the stabilization program. For example, gas and electricity prices were frozen until June. The petroleum and electricity ministries have been tasked with developing a comprehensive plan on how taxes on utility bills could be removed to relieve those affected by inflation. Earlier this month, the Prime Minister told a delegation of foreign investors that his government is now focusing on socio-economic growth.

A nearly 43.7% increase in revenue was collected from the main oil and gas products in the first half of the current fiscal year compared to the same period of last year, despite a a 10% drop in domestic production and a 20% drop in imports. This explains the new increase in commodity prices due to the increase in production costs and transport costs for the movement of goods across the country, both for domestic consumption and for exports.

While the stabilization program and structural reforms have not yet picked up momentum, the economy has slipped towards stagflation. Dr. Abdul Hafeez Shaikh says the tax revenue target has not been reached due to a slowdown in the economy, including contraction of imports, decline in consumption of petroleum products, the underperformance of the automotive industry and a difficult budget target. The Federal Revenue Council is said to be persuading the mission of the International Monetary Fund to lower the revenue target to 4,800 billion rupees.

As fiscal risks continue to haunt the country's economic team after 18 months of intense effort, the situation is slipping out of the hands of technocracy in the political arena.

Posted in Dawn, The Business and Finance Weekly, March 2, 2020