Tarin faces challenge to contain inflation without hurting growth

KARACHI: Veteran banker Shaukat Tarin who’s been appointed as the new federal finance minister will face daunting challenges to control inflation, spur growth, broaden tax base and support social safety net, analysts and industrialists said on Saturday.

“The key challenge for the recently appointed finance minister is to control inflation, addressing low GDP growth and the spread of the third wave of COVID-19,” Saad Hashemy, executive director at BMA Capital said. “It will be challenging to increase GDP growth while maintaining fiscal discipline. Only if inflation is controlled and interest rates remain low, then there is a chance of some increase in GDP growth.”

The government appointed Tarin as the third finance minister in a short span of two years. The growth shrank to 0.4 percent from over 3 percent. He’s been country manager of Citibank and head of Habib Bank, Union Bank, and twice as chairman of Karachi Stock Exchange.

The State Bank of Pakistan expects average inflation in FY2021 close to the upper end of 7-9 percent. Inflation should fall to the 5-7 percent target range over the medium-term, it said. .

Awais Ashraf, head of research at Foundation Securities said balanced growth with manageability of current account, implementation of IMF program and the curtailing of fiscal deficit and subsidies are the main challenges for Tareen.

“The key challenge is to make coordination between different ministries for implementation of any strategy that the previous two finance ministers struggle to find,” Ashraf said.

The finance minister can avail opportunities through channelising workers remittances to productive use, rationalisation of gas and electricity prices to reduce future accumulation of circular debt, and reforms of state-owned enterprises.

“To offer incentives for agriculture and the supply chain in order to ensure food security that alone cost us of $3 billion in additional food and cotton imports during nine months of FY21 other than domestic increase in food prices,” Ashraf said. “As the government enters its last two years of tenure, its actions will increasingly be motivated by political considerations,” said Ehsan Malik, chief executive of Pakistan Business Council.

“Preserving jobs is close second priority. Clearly, industry, the provider of jobs, will struggle if the mooted increase in utility costs and the burden of unrealistic tax targets falls on its narrow shoulders. There is also the danger that food inflation and higher utility costs combine in a multiplier effect on core inflation which then leads to higher borrowing costs. The recent Eurobond offering and inflows into the Naya Pakistan Certificate, albeit at a higher than market cost, have together with rising remittances shored up our forex reserves.” Malik said. “However, import of essential food items, cotton and the rising oil and other commodity costs do not bode well for the current account. The alternative to managing circular debt by passing on the cost of surplus generation, inefficiency and theft in transmission and distribution to honest consumers is power sector reforms. It is not possible to broaden the tax base without addressing the talent and technology gaps of the FBR.

Promoting availability of cotton and other essential crops entails reforms in agriculture. All three are medium to long term initiatives but create a sustainable basis of growth. Knee-jerk changes only lead to confusion and chaos, Malik said.

Malik noted that the best time for the current government to start these reforms was when they came into power. The next best time is now. Aside from political will, a paralysis that grips decision making is fear of NAB action. This must be removed through reforms of the NAB law.

“Exporters must continue to be provided power at rates that render exports competitive with regional countries. Those relying on captive power should not be forced to switch to the grid until the costs and reliability justify it. The process of cascading tariffs should be accelerated to support domestic manufacturing,” he said. “An eye should be kept on the real effective exchange rate of the rupee to avoid exports becoming uncompetitive. Borrowing costs should be kept in line with SBP's forward guidance.”