In view of the rate of inflation that has taken place, Prime Minister Imran Khan impeached the unelected technocrat Dr Abdul Hafeez Shaikh and handed the additional charge of the Ministry of Finance to the Federal Minister of Industries and Production Mohammad Hammad Azhar. He was tasked with designing policies according to the realities on the ground in Pakistan and (ensuring that) the poor received help.
The finance portfolio has been linked to industries and production, apparently for better policy coordination and better decision-making in changing policy priorities. Realities on the ground demand that the current mismatch between fiscal / monetary policies and the real economy that produces non-financial goods and services be drastically reduced to improve the fundamentals of the economy. For example, World Bank experts say Pakistani exports will decline further this year.
Realities on the ground demand that the current disconnect between fiscal / monetary policies and the real economy that produces non-financial goods and services be drastically reduced to improve the fundamentals of the economy
On his first day of work as Minister of Finance, Mr. Azhar had a meeting with the Governor of the State Bank of Pakistan (SBP), Dr. Reza Baqir. It may be recalled that within the framework of the bill on the autonomy of the SBP, fiercely criticized by the International Monetary Fund (IMF), submitted to the National Assembly, the refinancing facility would continue for as long as it was deemed necessary by a independent regulator, taking into account the overriding objective of maintaining price stability. Government borrowing from the central bank has already been reduced to zero as an IMF conditionality.
SBP support for government economic policies, to quote one analyst, has been relegated to a tertiary (not even secondary) objective. The federal cabinet reportedly approved the bill without dwelling on its details.
Banks’ risk-free investments in government newspapers soared 33% year-on-year in February, while advances that are boosting economic activity saw paltry 3.8% growth despite the surge in subsidized credit linked to the pandemic . Pakistan’s economic growth for the current fiscal year is estimated by the World Bank at 1.3%, while public debt will hit a record 94.4% of GDP from 72.5% in July 2018 when PTI arrived. in power. And the budget deficit will remain at 8.3% of GDP.
In the past, the Industrial Revolution was fueled by finance capital and cut off energy supplies in areas of concern to Pakistan. Fiscal expansion without a corresponding increase in output and supply fuels inflation. The World Bank estimates that inflation will remain at 9% at the end of this fiscal year. To get back to basics, prices are the end product of all economic activity.
Representatives of trade and industry have severely criticized monetary policy for cost-driven inflation, especially when the interest rate and the depreciation of the rupee hit their recent highs. The Planning Commission, responsible for socio-economic development, said recently that the current policy rate of 7% is high compared to those in the region and should be reduced.
Dr Sheikhs’ brutal impeachment just as next year’s budget approaches has also undermined the finance ministry’s position of strength, alongside that of prime minister for the past decades, shifting policy making. budget in the area of elected officials. It also demonstrates that it is beyond the realm of technocracy, including IMF prescriptions, to effectively resolve deep multiple crises. Perception that IMF reforms lead to cosmetic change is gaining ground among national financial analysts, economists, policymakers and parliamentarians
It can be remembered that Asad Umar was removed from his post as finance minister after eight months in office, the former SBP governor was asked to step down and the then finance secretary had to step down. to the government by trying to negotiate a reasonable deal with the IMF by seeking to mitigate the impact of the initial conditionality of the initial bailout.
Furthermore, affected by the fallout from Covid-19, the poor, the unemployed and the vulnerable whose real incomes have been reduced are the worst victims and there is no real solution in sight. The World Bank assessment report estimates that two million people have fallen below the international poverty line of $ 1.9 per day and that 40% of households suffer from moderate to severe food security.
The rift between technocrats and elected officials widened due to deteriorating economic trends and eventually forced the government to issue two ordinances, one to raise taxes and the other to relinquish its own fixing power. energy tariffs. Measures that will fuel inflation.
As a precondition for the last $ 500 million IMF tranche released, the bill sought to change the original dual mandate of central banks granted by the State Bank Act 1956 to promote economic growth and ensure price stability. The central bank’s proposed main objective was to ensure price stability, not growth.
A pertinent question in controlling inflation that has surfaced in the fierce national debate over SBP autonomy in a more lucid manner is: What is the real cause of inflation? For the last decade or more, inflation in Pakistan has been a function of supply-side factors, terms of trade shocks, currency devaluation, administered prices (such as tariffs, electricity), market imperfections rather than excessive demand, according to economist Sakib Sherani. He argues that with an average growth rate of 3.6% over the past ten years, the county is operating at about half of its potential production growth rate. Inflation must be contained by applying the right policy instruments. Inflation targeting is not one of them.
We are now in a phase of low economic growth and high inflation. During the last PML rule, we saw moderately high growth with low inflation. This exposes the myth that growth always heats up the economy. The growth rate forecast for the current fiscal year is between 1.3 and 3%, subject to the risks of the third wave of the pandemic.
Turkey recently sacked its market-friendly central bank governor a day after raising the interest rate to 19% and in its place appointed another central banker who shares the unorthodox view of the country’s presidents that rates high interest rates fuel inflation.
Frequent increases in energy prices are also a cause of inflation. Giving the regulator the power through an order to enforce its decision on rising energy prices without government intervention would essentially represent the continuation of a failed strategy of credit institutions imposed on Pakistan to counter the dire consequences of the policies. of 1991 supported by the World Bank, says Sherani. And as one energy expert puts it, without reforms and improving the efficiency of utility companies, tariff increases would be counterproductive.
Policymakers should make an appropriate diagnosis and, on this basis, find appropriate long-term solutions to bring inflation under control.
Posted in Dawn, The Business and Finance Weekly, April 5, 2021
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