No option to control yawning inflationary pressures
ISLAMABAD: The government is left with no option to control the yawning inflationary pressures in the wake of rising POL and commodities prices in the international market.
With the IMF or without the IMF programme, top Pakistani officials argued in background discussions on Tuesday that Pakistan’s economy was heading towards a difficult juncture where the government’s options were limited as it had to induce inflationary pressures coming through the surge in international prices.
The OGRA has recommended hiking petrol and diesel prices by Rs8 and Rs11 per liter respectively and there is no cushion available to the government to absorb any financial burden for avoiding passing on the hike in POL prices.
The POL prices in the recent past stood at $76 per barrel, so the OGRA asked for hiking both petrol and diesel prices to the tune of Rs8 and Rs11 respectively with effect from October 16, 2021.
Now the POL prices have climbed close to $83.40 per barrel, so in the near future the government would have to further hike the prices in the domestic market.
In case Pakistan’s economic managers strike a staff-level agreement in ongoing policy level face-to-face parleys held at Washington, DC, from today (October 13 to 15, 2021), Pakistan’s balance of payment position might be improved because the Fund would help to manage external financing requirements. Otherwise, the financing from other multilateral creditors such as the World Bank and Asian Development Bank through program loans would dry up, and raising the dollar through the issuance of international bonds would become an expensive choice.
When the balance of payment crisis might be worse than the exchange rate, rupee versus dollar might go out of control in the wake of the scarcity of dollar inflows.
It might lead to inflation skyrocketing. However, experts believe that if Finance Minister Shaukat Tarin strikes a deal during the ongoing policy level review talks, then the government would have to present a mini-budget for hiking the Personal Income Tax, especially for higher income brackets and secondly abolishing the GST exemptions.
The story does not end here as the government will be asked for raising the baseline electricity tariff by Rs1.40 per unit before presenting the approval case in front of IMF’s executive board by end of November 2021.
The government will also hike the gas tariff more at a time when the country might be in the grip of a severe gas crisis during the upcoming winter season. There are delays in importing RLNG, so the gas crisis is all set to worsen in the months ahead.
On the expenditure side, the IMF is also suggesting to curtail utilization of funds allocated under the Annual Development Plan approved by the National Economic Council (NEC) and the Parliament.
The government had approved an Annual Development Plan of Rs2.1 trillion for federal and provincial governments as the Centre allocated Rs900 billion under the Public Sector Development Program (PSDP) for 2021-22.
With changes in the utilization of funds plan approved and implemented by the Ministry of Finance, the development funds geared up the momentum and it would be hard for the government to halt it halfway. Out of Rs900 billion, almost 50 percent of the funds would result in increasing import bills and resulting into putting pressure on the current account deficit.
There will be only one solution for slashing down the PSDP funding in the last quarter (April-June) 2022 if the government would be ready to compromise its mega-development projects.
