Money Matters

What went wrong?

Money Matters
By Mehtab Haider.
Mon, 01, 20

The government has so far failed to bring any improvement in the inflation-wretched lives of the masses despite making deafening claims that economy has been stabilised after the “hard work” of one full year.

The government has so far failed to bring any improvement in the inflation-wretched lives of the masses despite making deafening claims that economy has been stabilised after the “hard work” of one full year.

However, the people are bearing the brunt of “adjustments” on all aspects under the so-called structural reforms programme handed down by the lender of last the resort.

If we analyse the existing economic policies in-depth, we will find it’s all driven by the government with the sole purpose to deliver on the front of International Monetary Fund (IMF) programme irrespective of how much it is going to cost the national economy.

The latest IMF agreement comprises of ‘traditional prescriptions’ following “one-size-fits-all” approach for which the fund is known. The formula is simple: tighten monetary/fiscal policies to compress demand, which will slow down economy and call it stabilisation.

Now the course of correction adopted by the government under the guidelines of the IMF was highly flawed and was bound to plunge the masses in pain in one of its consequences.

Although, it was a fact that there was no other way out but to get the IMF programme. But the devil is in the details on account of pace of adjustments for achieving the ultimate objective.

The pace of adjustments proved problematic and former finance minister Asad Umar fell prey to it. He was shown the door for being unwilling to put an unbearable burden on the common people of Pakistan. Now Umar is back in the federal cabinet as minister of planning, development, reforms and special initiatives.

It did not end here, because exactly when the IMF team was in town, former Secretary Finance Younas Dagha and former Governor State Bank of Pakistan Tariq Bajwa were also removed unceremoniously because they were resisting mainly over the pace of adjustments wrapped into tough IMF conditions.

The government then appointed Dr Abdul Hafeez Shaikh as advisor to PM on finance and revenues and Dr Reza Baqir as governor State Bank of Pakistan.

Within few weeks, the Federal Board of Revenue (FBR) chairman Jehanzeb Khan was also replaced with Shahbar Zaidi just ahead of the budget for 2019-20.

This new economic team accepted the IMF programme with front-loaded conditions as on fiscal front the FBR’s annual tax collection was envisaged at Rs5.5 trillion against a revised tax collection of Rs3832 billion that required a growth of 44 percent. In the entire history of the country, the FBR had never achieved 44 percent growth even when the real GDP growth was on much higher side in the range of 6 to 7.5 percent on per annum basis.

It was a totally wrong assumption as in view of a slowing economy and IMF’s projection for real GDP growth in the range of 2.4 percent for the current fiscal year 2019-20, expecting the FBR to work a miracle on revenue collection was absolutely unjustified and irrational.

On energy front, the power tariff adjustments on quarterly basis and hike in gas tariff on bi-annually basis were envisaged. The government in collaboration with the World Bank and Asian Development Bank prepared energy sector improvement plan, which it claimed arrested the ever-increasing circular debt, but the desired results could not be achieved fully.

The monetary tightening continues and the State Bank of Pakistan is maintaining the policy rate at 13.25 percent to contain inflation.

There were projections of the IMF and other multilateral creditors that the CPI (consumer price index) based inflation would start receding from January 2020 but a recent spike in food and energy prices suggest it was going to cross 13 percent mark for January 2020. And it is likely to hit its highest since this government came into power.

The rising food prices and cost-pushed energy prices are fueling the inflation. And a recent mismanagement on wheat/wheat flour will further worsen the situation because when these commodities become dearer prices of all other items follow the suit. The mismanagement and misgovernance are potential threats to escalate the wheat flour crisis despite the fact that the country achieved a bumper crop of 25.6 million tons of wheat in the last season. With strict management, the wheat flour crisis could be averted easily.

On other hand, now the SBP has an excuse to keep the policy rate on higher side as it helped it attract foreign inflows and achieve Net International Reserves (NIR) on quarterly basis.

With higher policy rate, the country’s large scale manufacturing was witnessing negative growth, increasing unemployment rate.

One recent survey done by international firm IPSOS also found that 83 percent Pakistanis worry about losing their job. They identified four worrying issues including rising inflation, unemployment, increased poverty, and additional tax burden.

At the moment, there is no coherence between fiscal and monetary policies and there is no clear roadmap on how the government will create tens of thousands of jobs in 2020, bringing prosperity in lives of masses.

The main cause of miseries riling the lives of people right now is the flawed reforms strategy agreed with the IMF as its programme binds Islamabad to suffocate growth, push up inflation, keep discount rate on higher side, and discourage provinces for fully utilising development funds.

However, we still have a chance of making adjustments on both fiscal and monetary fronts for spurring growth. That we can do by convincing the IMF team, due soon, to allow us to loosen the fiscal and monetary policies in complete synchronisation with other macroeconomic realities because without a fully-fledged cohesion no relevant objectives can be achieved on sustained basis.


The writer is a staff member