Avoid default, invite stagflation | Political economics

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“There were serious concerns that Pakistan was moving towards Sri Lanka and falling into a default situation, but this seems to have been avoided after significant changes were made” – Federal Finance Minister, Miftah Ismail, in a recent interview with CNBC.

SCertain macro-economic adjustments, mentioned by the Federal Minister of Finance, have helped Pakistan to prevent the risk of external default. However, the same measures created difficulties for the local economy.

The policy rate rose to 15% and inflation to around 24.9% on an annual basis (YOY) in July 2022. The current tsunami of inflation is getting gigantic and it looks like the Pakistani economy is sliding towards stagflation. Several reasons explain this situation. The current situation is the product of rising international commodity prices, particularly oil and food prices; supply shocks; and the decreasing value of the rupee.

After recent amendments to the State Bank of Pakistan (SBP) Act 1956, the main objective of the central bank is to achieve and maintain domestic price stability, that’s to say, low and stable inflation. Food and energy inflation is triggered by multiple factors such as global commodity prices, local and international tariffs, tariffs, and supply and demand mechanisms. For example, the ongoing conflict between Ukraine and Russia has caused major disruptions in the supply of energy and foodstuffs to world markets, leading to higher prices. In this scenario, the SBP cannot curb rising prices.

Legislation such as the Price Control and Prevention of Profiteering and Hoarding Act of 1977 place price management in the domain of the federal and provincial governments. Therefore, assigning this role to the SBP is futile. The central bank appears as a mere spectator in this situation. It has neither the administrative apparatus nor the intention to solve this problem.

The weakness of the government and the SBP can be corroborated by the recent estimates of inflation by the International Monterey Fund. According to the IMF, “global inflation [estimate] has been revised upwards due to food and energy prices as well as persistent imbalances between supply and demand”. It is expected to reach 6.6% in advanced economies and 9.5% in emerging markets and developing economies this year.

The level of inflation estimated by the central bank is however twice as high for Pakistan. The State Bank of Pakistan’s recent monetary policy statement states: “Inflation is expected to remain elevated around current levels for much of FY23 due to the large supply shock associated with the necessary cancellation fuel and electricity subsidies. As a result, inflation in FY23 is expected to hover around 18-20% before falling sharply in FY24”.

It is regrettable that to date no concrete effort has been made by governments to help low-income groups. The only thing worth mentioning in this regard is the flagship Benazir income support program, launched by the coalition government of the Pakistan People’s Party and the Pakistan Muslim League (Nawaz) in 2008.

Recently renamed, the project expands unconditional cash transfers and support programs. However, these measures alone are not enough to fight against inflation and poverty. A study on the state of poverty in Pakistan by the Pakistan Poverty Elevation Fund provides statistical details claiming that in Pakistan, about 22% of the population lives below the poverty line, of which 5.5% can be classified as “ultra-poor”. While 16% of the population is at the poverty line, around 20% are vulnerable, placed slightly above the poverty line.

Recent government measures, including raising the policy rate by 125 basis points to 15%, imposing selective embargoes and increasing cash margins to reduce the import bill, make the environment for difficult business..

Given the alarming situation, the government must recognize that it cannot simply pass the impacts of global and local economic shocks onto the common man. Rather, it must act to protect vulnerable segments.

Successive governments have instead ceded their administrative role to regulators. It may seem like a step-by-step measure, but in the absence of technically sound and qualified supporting apparatuses and human resources, most of these steps did not yield the expected results. These have failed miserably to demonstrate a move towards a balance between commercial decision-making and public interests.

The energy sector is a perfect example. The State of the industry National Electric Power Regulator’s (NEPRA) report for fiscal year 2021 accuses the government of negligence in underutilizing the most efficient regasified liquefied natural gas (RLNG) power plants as well as other cost-efficient power plants. The underutilization of efficient power plants is one of the main reasons for the rise in the price of electricity.

The report mentions that the RLNG request had been forwarded to the neighborhoods concerned well in advance. Yet the government failed to acquire the required volume of RLNG. As a result, on several occasions, various RLNG power plants have been either idle or underutilized, and more expensive power plants have been relied upon.

Pakistan’s Tehreek-i-Insaf government, acting at the request of the IMF, had made some changes to the Electric Power Generation, Transmission and Distribution Regulation Act of 1997 to automate the process. notification of tariff changes and adjustments. . Under this amendment introduced in 2021, NEPRA appears more powerful than the government. Regulation 31(7) of Chapter IIIB clearly states that “the tariff or uniform tariff approved by the Authority, as the case may be; tariffs, charges and other terms and conditions for the supply of electrical energy services must be published in the Official Gazette by the Federal Government within thirty days of their notification by the Authority. In the event that the Federal Government fails to notify the tariff so determined by the Authority, or to refer the matter to the Authority for reconsideration, within the time specified, the Authority may direct the immediate application of its recommended tariff and approved or of its uniform tariff such that the matter may be the subject, by notification, of an adjustment which may take place following a re-examination”.

The astonishing increase in energy bills reflects poor energy management policy which needs to be urgently corrected as it has already started to take its toll on the common man and increased the cost of doing business in the country.

Recent measures taken by the government include raising the policy rate by 125 basis points to 15%, imposing selective embargoes and increasing cash margins to reduce the import bill; also complicate the business environment. The fallout from macro-economic adjustments reaches businesses and there is no protection or support available to them to ensure long-term sustainability and progress.

Importers, traders and manufacturers are facing a shortage of industrial raw materials. These are causing undue disruption and could trigger a wave of business closures and unemployment.

With little hope and limited economic buffers available for immediate relief, the least the government can do is realign its policy direction in consultation with stakeholders and policy experts. There may be a case for taxing certain untaxed sectors and carrying out a full cost-benefit analysis to assess the financial viability of preferential treatment given to a few industries. This will help reduce the burden on businesses that are currently absorbing the cost of these benefits. Meanwhile, the government will have more funds to spend on social protection.


Abdul Rauf Shakoori is a US-based corporate lawyer

Supreme Court Advocate and Writer Dr. Ikramul Haq is Adjunct Professor at Lahore University of Management Sciences


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