Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
The evolving global and local geopolitical landscape is posing serious economic challenges for the new government in Pakistan in the backdrop of an already ailing economy. In the recent months and especially on the inflation front the situation has deteriorated considerably due to prevailing political and economic uncertainty vis-à-vis global commodity prices and deteriorating financial conditions.
Although the entire world is facing similar pressure in view of high commodity prices, especially those of oil and other energy-related items, inflation will continue to rise in Pakistan unabatedly. If this trend persists, the State Bank of Pakistan (SBP) will be left with no choice but take strict actions like increasing policy rates to ensure fiscal tightening and taking the bull of inflation by its horns. The most troublesome part is the legacy of flawed economic policies left by the previous coalition government of Pakistan Tehreek-e-Insaf (PTI). The so-called populist decision of freezing fuel prices is fast depleting all the budgetary buffers. The subsidy which is required to keep the petroleum prices intact will significantly increase the budget deficit, the price of which will be paid by the common man in the shape of higher taxes, increased policy rates, and reduced developmental expenditures.
Statistics recently released by the Pakistan Bureau of Statistics (PBS) depict an alarming picture where Consumer Price Index (CPI) in April 2022, on a Year-on-Year (YoY) basis, posted an increase of 13.4% whereas last month it was 12.7%. “On month-on-month (MoM) basis, it increased by 1.6% in April 2022 as compared to increase of 0.8% in the previous month and increase of 1.0% in April 2021”. The CPI inflation rate has been constantly hovering beyond the double-digit mark for the last six months. In April 2022, ‘Core Inflation Non-food Non-Energy (NFNE)–Urban’ “increased by 9.1% on (YoY) basis in April, 2022 as compared to an increase of 8.9% in the previous month and 7.0% in April, 2021. On (MoM) basis, it increased by 1.1% in April, 2022 as compared to increase of 1.2% in previous month, and an increase of 0.9% in corresponding month of last year i.e. April, 2021”.
Dissection of PBS’ data transpires that the main contributors in YoY increase are Furnace Oil (107.43%), Fibre Crops (81.34%), Cultivators (68.18%), Vegetable Ghee (67.18%), Oil Seeds (65.83%), Concrete Mixture (63.24%), Chemicals (61.54%), Coal (57.42%), Vegetables (56.00%), Kerosene Oil (54.96%), Steel Bar & Sheets (51.60%), Fertilizers (48.12%), Vegetable Oils (41.85%), Diesel (41.01%), Motor Spirit (40.38%), Fruits (37.17%), Cement (34.72%), Air Conditioners (32.71%), Tractors (30.77%), Bed Foam (28.95%) and Motorcycles (23.92%).
This pace of inflation does neither match with the purchasing power of the overwhelming majority of citizens nor does it align with the rise in their income. The gap between income and expenditure is eroding the savings of people and their hopes for a better quality of life.
During its recent visit to the Kingdom of Saudi Arabia, the official delegation succeeded in attaining affirmation of the Kingdom’s continued support to Pakistan to enable it to address challenges arising out of increasing global oil prices and its reciprocal impact on foreign exchange reserves including the possibility of augmenting US$ 3 billion deposit with SBP. Both sides also agreed to explore options to further enhance the financing of petroleum products and supporting economic structural reforms for the benefit of Pakistan and its people.
Final details are awaited, but it is expected that the already extended US$ 3 billion deposit and existing deferred payment oil facility of US$ 1.2 billion, would be extended at double the current scale. This will help improve investment cooperation between the two countries, inspire partnerships, and facilitate investment integration opportunities for their private sectors.
Most importantly, the momentum of depleting exchange reserves which recently paced up owing to debt repayments and sovereign payments re settlement of an arbitration award related to a mining project, would now perhaps slow down, rather this might be reversed into positive inflow as official creditors are expected to renew their loans. However, the current government needs to realise that using an orthodox approach to address the current economic issues will adversely impact life of the common man. Therefore, time is ripe for the government to sit with all stakeholders and devise a new economic policy focused on boosting growth and introducing structural reforms to address the rapidly increasing economic imbalances.
The government should also focus on controlling heavy leakages to the government exchequer in the form of circular debt (CD), gas CD, or losses incurred by state-owned enterprises (SOEs). The volume of CD in the power sector was recorded at 0.6% of GDP in FY 2021 while the International Monetary Fund (IMF) staff report further highlights growing current account deficit stock to 4.8% of GDP at the end of this fiscal year (FY). The report notes that the CD flow has remained “well above expected levels since the start of the program, mainly because of delay in tariff adjustments, high debt costs, and operational losses by distribution companies (DISCOs)”. The report also indicated that substantial CD stock of more than 1% of GDP has also accumulated in the gas sector “pending the finalization of the authorities’ ongoing cleanup of the underlying data. The main drivers are high unaccounted for gas losses (UFG), often delayed sales price adjustments, uncovered subsidies (especially for export and zero-rated industries), and collection shortfalls”. These leakages are draining our entire financial standing. The new government should focus on addressing these long-standing issues to stop the waste of resources.
Similarly, SOEs are adversely impacting our resources. As per the IMF’s report, value of assets of non-financial commercial SOEs was recorded at 44% of the GDP but they only provide 0.7% of total formal employment. The report further states that “there are 213 SOEs, of which only 85 are commercial operations (18 financial and 67 non-financial)”. “The overall revenues of all non-financial commercial SOEs in FY 2019 were about PRs 5 trillion (14 percent of GDP). Despite their important role in the economy, the financial performance of many SOEs is weak, with one-third consistently generating losses”, the report adds.
The new government should focus on redefining the fiscal policy based on tax revenue mobilisation to strengthen medium-term adjustment, ensure fiscal sustainability, address monetary policy issues and introduce structural reforms to strengthen the energy sector and redress issues related to circular debt. It must also lay emphasis on growth to review economic activity in the county.
Prime Minister, Shehbaz Sharif, is known to be a good administrator, but he still needs to improve overall governance which on the one hand plays a pivotal role in creating a healthy business environment and on the other addresses concerns of the global community. The policy of raising energy prices to meet financial goals will not serve any purpose in the long run but will further add to the hardships of the common citizens.
Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions