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Wednesday October 27, 2021

In the midst of fiscal indiscipline

October 14, 2021

LAHORE: The stability of the rupee depends upon the central bank’s actions to limit the import led GDP growth. Restriction on imports and increase in policy rates are the options that need to be exercised with care.

The implications of lower rupee value are numerous. It hurts the consumers as the prices of all import-based products (including raw materials) go up.

The cost of petroleum products, LNG and LPG would shoot up even if the rates of these commodities do not increase in the global market. Unfortunately, at present the rates of all these are increasing globally.

Most of the edible oil is imported, and weaker rupee would increase its cost because of the dual pressure of weak currency and government levies that have a multiplier effect on cost.

Foreign debt servicing cost would increase in rupee terms as well, putting further pressure on the weak finances of the state.

If the rupee is allowed to weaken further, inflation would spike as well.

The central bank would be constrained to push the interest rates up, which would raise the cost of borrowing as well as the cost of doing business.

The central bank has already taken measures to curb imports to ease the pressure on local currency. Decline in imports would hit the Federal Board of Revenue (FBR), as currently over 50 percent of the revenues are coming from import levies.

This government is already operating with a historic fiscal deficit that would be further enhanced.

GDP growth in 2021 was triggered with the help of a liberal import policy and low interest rates. Currency remained stable at a low level during the last fiscal year, and the government got relief on foreign debt for a while.

On many occasions, Pakistan’s economy has grown at 6 percent or more without any signs of overheating, but 3.94 percent growth last fiscal overheated the economy probably because the growth in the previous two years was 1.9 percent and minus 0.4 percent.

The growth momentum would slow down after expected tightening of interest rates and anti-import measures. In the current year, growth would depend upon the central bank’s monetary stance and import-based measures.

The government would have to take prudent decisions too.

For now, it is still in public appeasing mode. It announces one measure after another based on subsidies. However, most of these go down the drain.

The subsidies make no impact on alleviating poverty, and instead make a big hole in the government's budget. All the efforts of the State Bank of Pakistan would be wasted if the government failed to discipline its fiscal stance.

Ground realities indicate that the going is tough in the short and medium-term. Our economy is in a real mess.

There has been a constant increase in our annual budget outlay despite tall claims of austerity.

One can understand the small increase on account of annual salary increase that has a small share in the budget.

But the increase in the budgets of all government departments raises eyebrows. Instead of raising budgets for all, there is a need to apply austerity.

Usage of resources without any limits strains the budget. Government departments use state vehicles freely and without any proper plan.

The government should reduce the petroleum budget of each department by half (in litre terms). We would then not see the state-owned cars and vans picking up children of the officers from schools and colleges or their wives and relatives visiting shopping malls frequently.

With increase in electricity tariff, the power bills of government offices have doubled. There is no pressure on conservative use of power.

The use of air conditioners should be curtailed to four hours a day during excessive heat periods in summer.

Instead, the air conditioners are switched on hours before the arrival of officers and are not generally switched off when officers leave for meetings. There should be a cap on power consumption.

In this age of information technology, most of the administrative and monitoring work could be done from the office desk instead of going on tours of different provinces or cities.

The district education officers instead of visiting schools and colleges on government expense can monitor each educational institution in real time from their office desks. The system is in place at least in Punjab where the renowned computer scientist Umar Saif has installed systems in schools and government health care centres.

These could be monitored 24/7 from the offices of the relevant officers. The government could also encourage the citizens (parents of students or patients) to upload their bad experiences at a given site.

In the final analysis it all boils down to establishment of government writ and strict adherence to the rule of law.