Policies in silos

LAHORE: The impact of withdrawal of tax exemptions and enhanced taxes would be applicable after the passage of the finance bill from the National Assembly, but businesses have already increased rates knowing well the government’s inability to exert its will.

Retailers are not only charging higher prices for the items affected by the finance bill, but also on items that would not be much affected.

Bread for instance is a daily use item at breakfast. The rate of medium-sized bread has been increased by Rs5 to Rs70 and that of large size from Rs130 to 140.

Rates of all imported items have also been enhanced. This is the reason that budget measures in the past were not leaked to avoid hoarding and illegal profiting by the businesses.

Absence of documentation at retail level encourages unwarranted price hikes, while the state’s weak control on documented sectors encourages charging taxes that are yet to be imposed.

The economy has been badly impacted by weak governance. Price hikes trigger inflation and inability of the state to properly collect taxes enhances the budget deficit.

Policymakers take decisions without proper planning. We have seen imports totally squeezed during the first 18 months of this government and then unleashed in the next 8 months.

In both cases, the decisions were on the extreme side. After squeezing imports, the government planners realised that it halts growth.

After liberalising imports, it found that Pakistan’s foreign reserves are not enough to bear the cost of high imports. The government started checking imports in June 2021 and 6 months down the lane has not been able to put a real break.

Rupee as a result suffered a heavy blow. Foreign exchange reserves remain volatile as the country consumes at least $1 billion more than the foreign funds available with it.

Huge foreign loans, higher exports and higher remittances are not enough to plug the current account deficit.

Even the economic managers are not sure of the way the economy would move in the short-term.

Decisions are taken abruptly, and then withdrawn as well, because the decisions were made without any homework. The government committed to few export sectors that it would provide them imported gas at $6.5/mmbtu for five years.

Soon it realised that it was not possible to bear the subsidy needed to fulfil this commitment. It raised the tariff to $9/mmbtu.

Still the supplies remain erratic as the gas supplies from abroad were not arranged in time.

The previous government committed LNG (imported gas) supplies under a formula based on the global crude oil rates and the expenses incurred by the gas distribution companies (including gas losses).

That formula was based on ground reality and would have worked indefinitely. The planners of the present regime never factor in the global rates of gas and committed a price that they could not afford if the rates increased as they did.

The government announced a long-term textile policy after long deliberations that took almost 30 months. Then it abruptly withdrew.

Perhaps the Ministry of Commerce and the Ministry of Finance were not on the same page. The commerce ministry should have first settled issues with the finance ministry before announcing the textile policy.

Its abrupt withdrawal has not gone well with the textile sector. This has eroded the confidence of the textile sector in the government.

The major issues of the industrial sector relate to the ministry of commerce, Ministry of Finance, Ministry of Water and Power and to the newly added ministry of energy. The policies of each of these ministries are not synchronised.

In fact, the basic policies are in conflict with the policies of the Ministry of Commerce. Commerce wants concessional power and energy. The cost of power and energy is much higher.

The Commerce Ministry seeks assistance from the Ministry of Finance to provide subsidies.

The problem with the Ministry of Finance is that the subsidy agreed becomes short when energy and power rates increase.

The commerce ministry never factored in the impact of expected volatility in power and gas prices. Moreover, the subsidy is sought based on last year’s exports. When the exports increase by 27 percent the subsidy ought to increase as well. That additional amount is not budgeted.

All economic planners of the country must be on the same page and evolve policies with which they could stick to for a year or two. Policies in silos would always backfire.