First of all congratulations to the second IBA graduate, Asad Umar, the most probable name to occupy the slot of Finance Minister of Pakistan, the first one was Shaukat Aziz. There is certainly a visible difference between the conditions when Shaukat was asked to shoulder this responsibility and the time Asad is being asked to carry the heavy load of external debt and faltering economy. The commonality is that both aimed at developing homegrown plan, unlike others who have been following the dictate of multilateral lenders and the lender of last resort, IMF, blindly.
I have often written that Pakistan suffers from three deficits, namely trade deficit, budget deficit and worst of all, the confidence deficit. Over the last quarter of a century I have been hearing about these deficits but little have been achieved because the successive governments have been following IMF recipe blindly. If anyone tends to differ with my narrative, he/she must look at the recent increase in the policy rate by 100 bps to 7.50%. The increase has been justified by saying, “In order to curb aggregate demand and ensure near-term stability, the committee has decided to increase the policy rate”. It seems that the committee was unaware of the ground realities and used cliché to justify a mistake.
Let everyone know that the vast majority of Pakistan’s population lives below the poverty line. The items of their daily consumption have inelastic demand. They are forced to pay the prices through their nose, be it wheat or petrol. Import of crude oil and petroleum products constitute the largest percentage of import bill. At times, keeping in view the hike in international oil prices, increase in domestic prices of POL may become inevitable. However, the consumers suffer because the successive governments have been charging out of proportion levies on energy products to meet budget deficit. According to some analysts at time the levies have been more than the cost of certain products. In Pakistan high speed diesel (HSD) price is more than the price of motor gasoline. While the poor, using public transport are being penalized, the owners of most expensive cars use low cost CNG.
The second point to consider is that prices of most of the products are not driven by demand but persistently rising input costs. Agricultural and industrial sectors have lost competitiveness because of rising cost of production. The price of a basic agricultural input – urea – is on the rise due to the persistent hike in gas price. Manufacturers of textiles and clothing are witnessing erosion in competitiveness because of the hike in energy cost. The result is that Pakistan’s share in international trade of textiles and clothing has not gone beyond 3%, despite that fact the country is among the top five largest cotton growing countries.
The Government of Pakistan (GoP) is the biggest borrower of the commercial banks and no one knows it better than the top officials of State Bank of Pakistan. Did they really bother to calculate the hike in debt servicing resulting from one percent increase in policy rate? The immediate reply could be big no, as they failed in containing ever increasing borrowing by the GoP. Bulk of the government borrowing consists of up to one year treasury bills and less than 10-year Pakistan Investment Bonds. Experts are also hinting that the central bank may increase interest rate by another 1.5% within the first quarter of the current financial year. Therefore, further hike in interest rate could prove suicidal and must be resisted during negotiations with IMF.
Keeping in view the paltry foreign exchange reserves, two pronged strategy has to be followed, discouraging import and facilitating export. According to some analysts, despite facing adverse balance of payment, the country continues to import many luxury items. Import of such goods can be contained by imposing heavy regulatory duty, which will certainly not affect the common men. Exports can be increased by paying refund claims at faster pace, bringing down interest rate and energy costs. Financial health of energy companies can be improved by containing blatant theft of electricity and gas and rationalizing tariffs.
Another area needing immediate attention of the government is boosting remittances. There has been constant reduction in inflows because of turmoil in the Middle East, but more importantly due to fast erosion of Rupee value the remitters have started using informal channels. On top of that exporters also prefer to keep their proceeds outside Pakistan to take advantage of rupee depreciation.
While discussing depreciating value of rupee, it is also to remind that the GoP must not agree on devaluation because it will open the floodgates for inflation. Those exporters who have already signed export orders may benefit, but the industry at large would be the worst victim of cost pushed inflation.
Although, Finance Ministry will have little say in boosting indigenous production of oil and gas, it can certainly discourage exploration & production companies from declaring lofty dividends and spend more in drilling new wells. KPK is rich in oil and gas and restoration of peace would encourage E&P companies to work there.
Last but not the least; the focus should be on improving yields of agricultural crops and restoring competitiveness of the industrial sector. Focusing on five major crops (wheat, rice, sugarcane, cotton and edible oil seeds) will benefit in boosting exports. Similarly, focusing of five key industries (fertilizer, cement, oil refining, textiles and clothing power generation) could help in producing exportable surpluses.
The option of approaching IMF must be exercised but only after doing proper homework, which demands coming up with home grown plan rather than accepting recipes of multilateral lenders blindly. This also demands developing cordial relationship with the world and regional powers, a domain of Ministry of Foreign Affairs. It must always be remembered that only those countries enjoy respect in the community of nations who have strong economies.