Threading the needle

In accordance with expectations but contrary to economic prudence, the incoming Prime Minister Shehbaz Sharif announced a raft of relief measures including a 10 percent increase in civil and military pensions and a Rs10,000 hike for those government employees earning less than Rs100,000 monthly. Minimum wages for workers have been increased to Rs25,000 per month.

The relief measures thus announced beg the obvious question: if the economy was in such dire shape only the previous week what could have changed so rapidly that allowed for such fiscal generosity? These measures will further fuel the already high inflation rate of 13 percent and hasten the decline of the external value of the currency.

Fortunately Mr Sharif has backtracked to some extent; consequently the decision about the 10 percent salary increment has been reversed.

The elephant in the room for the new government is their management of the economy. The combined opposition parties now in government need to show that they can do a better job than the PTI government which they charged with gross economic mismanagement.

With the economy slowing (the World Bank has slashed the growth forecast for Pakistan), tax receipts will also decline taking the fiscal deficit beyond the relatively safe limit of 4-5 percent of GDP. Mr Sharif will find that the free hand he enjoyed as chief minister of Punjab that enabled him to project an image of a dynamic action-oriented leader no longer holds. Instead he’ll have to manage a motley crew of frenemies who only banded together because they wanted to oust Imran Khan from the prime minister’s job. Decision-making will therefore be hamstrung because the prime minister will be spending time struggling to hold the coalition together that will divert his attention and pull him in different directions.

One of the first tests of the cohesiveness of the coalition will be the reaction to transfers and postings of civil servants by the new government. Each of the parties will want to have a say in the matter because of the upcoming nationwide elections (due no later than August 2023). Having an official considered sympathetic to your party in a key post is a vital factor in determining the outcome of elections in nascent democracies like Pakistan (To paraphrase Joseph Stalin ‘it’s not the voters that count, it’s the counters that count’.)

Why the economy cannot be fixed easily is primarily due to the fact that inflation is now a universal phenomenon and even developed economies such as the US and UK are wrestling with levels of inflation they have not experienced for decades. Moreover, it’s for the main part a supply side inflation with shortages of parts and components causing supply chain disruptions and global microchip shortages forcing stoppages/slowdowns of production of many products from cars to smart phones to washing machines. China’s Covid-related lockdowns have only added to the problem.

Thus hiking interest rates as the State Bank of Pakistan has recently done will not make any difference to the prices of food items or to the retail price of cars. Indeed the State Bank is likely to raise interest rates further as the US Federal Reserve (the US central bank) has already announced a staged increase in interest rates and is also engaged in quantitative tightening (QT) which is aimed at raising longer-term interest rates in the US. This will only add to Pakistan’s debt burden and to the cost of doing business.

What is really going to hurt many developing countries including Pakistan is the rampant escalation of prices of commodities such as oil and food crops such as wheat, maize, and soybean, and fertilizer price hikes subsequent to sanctions on Russia’s potash, urea, and ammonia exports.

Pakistan’s trade deficit will be stretched to the limit with higher oil and food prices since we’ll be importing at least three million tons of wheat this year, apart from higher cost vegetable oil, to meet both local requirements and the smuggling of wheat flour into Afghanistan.

The kind of measures that are required to turn the economy around, such as the resolution of the problem of circular debt and the privatization of state-owned enterprises and widening and deepening of the tax net, cannot be completed within the time period the current government has at its disposal. Moreover, fiscal, monetary, and supply side measures take time to have an impact (economists call these time dependent adjustments by businesses and consumers ‘lags’).

The most effective method to curb the trade deficit and moderate the depreciation of the rupee is the enactment of regulations. These can have an impact almost immediately but require political boldness.

One step that the government should undertake is the rationing of petrol and diesel. Fuel cards can be issued to all registered vehicle owners, enabling them to purchase a modest amount of fuel monthly at a controlled price with exceptions made for buses and vans used for public transport which would get permits to buy fuel at the administered price based on their previous usage records.

Any amount needed beyond the stipulated maximum would have to be bought from those not fully utilising their petrol/diesel quotas at a rate to be fixed each week by the Oil and Gas Regulatory Authority (Ogra). (Petrol pumps would be positioned as a platform for contact between buyers and sellers).

In effect we would be encouraging the development of a retail trading market for fuels which would also be desirable for equity reasons since those who pollute the most would be charged the most.

Other measures that are needed include a ban on import of luxury cars, on high-end smartphones, and on the import of non-essentials like cosmetics and packaged food such as breakfast cereals, confectionery items etc. The government should also impose higher taxes on foreign travel and ask the banks to stop consumer financing of automobiles. An excess profits tax needs to be imposed on large corporate entities that enjoy virtually untrammeled pricing power and earn supersized profits including car makers, cement manufacturers, and commercial banks.

Much higher real estate and land taxation is now an inescapable need and this is an issue that has to be addressed urgently if we’re to get a handle on the fiscal deficit.

The dilemma for the Sharif government is that the usual method of tinkering at the margins means that the economy would limp along till we reach the dreaded precipice beyond which lies the uncharted terrain of debt default; on the other hand, continuing with the IMF programme may will cause further pain for the public. Further, there is no guarantee that resumption of the IMF programme will work as intended. This is because the world economy could experience a significant recession later this year which may blow Pakistan’s economy off course. Remittances and export earnings would be at risk.

In the political arena what Imran Khan has done successfully after his ouster is to change the frame of reference around political discussions because of which many voters are now looking past his government’s performance or lack thereof. By successfully transforming the political narrative, the PTI government may well have dodged a bullet.

The onus is now on the current government to prove that it can do better than its predecessor in its stewardship of the economy. But the longer it delays general elections, the greater the odds that a steeper electoral price will have to be paid.

Email: iqbal.hussain@janggroup. com.pk

The writer is a group director at the Jang Group.