Food inflation may prove to make or break for incumbents
Abid Qaiyum Suleri is the Executive Director of the Sustainable Development Policy Institute since 2007. He is a public policy advisor and development practitioner, who serve on various policy & advisory forums at international, national & regional platforms.
Currently, he is serving his third stint at Prime Minister’s Economic Advisory Council. In the past, he has served on National Advisory Committee of Planning Commission of Pakistan; and Trade Policy Advisory Committee, GoP. He has served across a wide array of platforms ranging from the board of key universities and on audit & finance committees of public sector enterprises.
In his role as policy advisor, he regularly reflects on the political economy of Pakistan in prominent research publications. Given the recent flurry of activity on IMF program, BR Research sat down with him to seek his perspective on recent news coming out of Q-Block, and what the latest round of fiscal stabilisation might entail for economy. Below are the edited excerpts
BR Research: Let’s start with a performance review. How do you grade the nine-month performance of the incumbents?
Abid Qaiyum Suleri: I believe this government behaved in a similar way any other government would have. Given the fiscal and current account mess at the time PTI took office, it had few other choices except reaching out to friendly countries and IMF for support.
However, it could have managed things better on two fronts. First, the decisions to approach IMF were unnecessarily delayed. And second, the government failed to manage public perceptions.
A party elected on a narrative of change should have been able to build a narrative centered on reform agenda.
BRR: How do you see economic challenges panning out over the next two quarters?
AQS: As we speak, IMF mission is on a visit and has already met with the bosses at Q-block. Over the next six months, the focus of fiscal administration perhaps needs to ensure that the macroeconomic inflationary pressures are kept separate from the micro-level inflation caused due to administrative failures.
Let me illustrate. Abnormal increases in prices of commodities in food basket witnessed prior to and during Ramazan have nothing to do with IMF or currency devaluation.
Second, the government needs to take political stakeholders along with general public into confidence over why it was necessary to undertake measures for macroeconomic stabilisation at this stage.
While the fiscal and current account reasons are just as important, it was critical to approach IMF to maintain country’s credibility in the global financial community. IMF’s Letter of Intent is crucial to ensure that credit rating is not downgraded by rating agencies such as Moody’s and Fitch. Over the past year, how often have you heard this angle being highlighted by the treasury benches, let alone the media?
Yesterday, the new finance minister interacted with financial journalists covering developments at Q-block. We need to see much more of such discussions between the press and government’s economic team. Otherwise, whispers and rumours will continue to dictate market sentiment.
Third, yes, it is a foregone conclusion that the IMF package will determine the contours of fiscal contraction in the upcoming budget. But that in no way means that the ruling party will have no room to offer relief to the lowest income tier.
The PM holds agenda for social sector development very dear. PTI can still deliver on this front because it holds power in two and a half federating units. It can undertake measures to improve services such as potable water, sanitation, education, healthcare and agriculture. These are all provincial subjects anyway. Unlike at the centre, provinces have the fiscal room to invest in public sector development. Moreover, they retain unexplored avenues to raise revenues.
While it is satisfying to see that discussions on the NFC award are already underway, PTI should take the baton to push for provincial finance award as well. After all, encouraging democratic institutions at grassroots levels was a salient feature of their election manifesto.
Remember, if we are to ever see an end to inequity in public spending between Karachi and Kashmore or Rajanpur and Rawalpindi, fiscal devolution to tertiary governments is essential. It will enable a more equitable distribution of resources based on metrics such as population and poverty. This will have a ripple down effect even if austerity curtails PSDP at the centre.
BRR: Let’s stay at IMF for a moment. Do you believe entering an IMF program early on would have reduced the uncertainty that we see in markets today?
AQS: The delay had its positives too. Unlike past governments, the incumbents proved their credibility by succeeding in raising support from friendly countries to meet balance of payment requirements for the first three quarters.
Except, the government should have clearly communicated from day one that it will not enter an IMF program in its first fiscal year. That would have set the inflationary expectations and investment climate accordingly.
During the past nine months, the limbo and indecision on IMF program led to a dollarisation of economy, where every other person tried to convert his savings to cash in on exchange rate speculation.
BRR: You mentioned that administrative measures are needed to curtail inflation in food prices. Stringent measures to reign in speculation in commodity mandis’ were common during the PML-N rule. Do you think the incumbents have the will and competence to take similar actions in their freshman year?
AQS: It doesn’t matter whether they lack the willingness; inflation in food prices may prove to be the make or break for this government.
Granted, it is in a catch-22 situation, specially since Brent prices are touching $72 per barrel. I believe the recent decision to not pass on the effect of oil prices right before Ramazan is a temporary but much needed step.
This is especially significant considering government will need to pass on additional taxes close to Rs500 billion in the upcoming budget right after Ramazan. In order to make those unpopular decisions more palatable, keeping food prices under check around Eid will be a litmus test. If they fail, you will see both opposition and media driving the government into the corner, and it may find it hard to fight its way out of it.
BRR: You are also a part of Economic Advisory Council (EAC). Do you believe that the outgoing finance minister was unable to make full use of the members’ expertise?
AQS: No. Sub-groups were formed to prepare strategies on issues such as export competitiveness; macro-economic stability; poverty & social safety nets. Reports were submitted and a lot of the recommendations contained therein were incorporated into the second amendment to the finance bill presented by this government.
The macroeconomic framework was handed over by EAC back in November 2018. Yes, because of the other urgent priorities at the time, government was unable to pace its synthesis, which resulted in a delay in its announcement.
I was a member of two EACs during the previous government as well, and I can tell you that the current EAC has held meetings far more frequently than its previous incarnations. It is easy for experts like us to peddle policies sitting on the outside; decision makers on the other hand must take into account the political economy of those policies.
BRR: What approach has the fresh finance minister taken to EAC?
AQS: Please remember that it is Prime Minister’s Economic Advisory Council, not finance minister’s. The new FM has been preoccupied first with IMF and now BRI, but I am sure once things settle, he shall call a meeting of EAC members and apprise us with details of discussions with IMF. At the same time, most members have continued their policy advocacy through op-eds and media. As policy advisors, we continue to raise our voices from both within and without official forums.
BRR: Another economic advisory board has been formed which consists of practitioners from the industry. What is your opinion of the efficacy of forming two councils at the same time?
AQS: The efficacy depends on how well such taskforces are utilised; whether their recommendations are incorporated into policymaking. After all, governments are under no obligation to follow advisor’s counsel.
BRR: A commonly held view is that outgoing FM failed to timely change the Finance Secretary, who was well reputed as an administrator but was not a subject specialist. The position of DG DMO also remained vacant. No advisors were inducted in executive capacity, even though the FM lacked experience in public finance. Do you agree that this contributed to the performance gap on fiscal front?
AQS: Asad will be better able to answer this. However, naturally a question arises whether subject specialists are better suited for these positions or technocrats who have served in the ministry under several regimes and have a better appreciation of how to keep the administrative machinery running. Both have their merits and demerits. Having a powerful finance secretary who overshadows the minister is also not a great idea. It is always a balancing act.
BRR: Another criticism on the outgoing FM is that soft negotiations with IMF did not make any headway. Is that impression correct?
AQS: No. Not only Asad Umar and his team, even the SBP governor met with the IMF team. Formal negotiations with the staff mission may have seen delay. But even informal interactions with IMF revolved around identifying targets; revenue gaps; expenditure cuts and social safety nets.
BRR: Agreed. But given that government will have to impose additional taxes equivalent to 1.2 percent of GDP to meet the revenue gap, yet no details have been figured out with the IMF to this effect?
AQS: Both FBR and FinMin are looking in avenues of revenue collection. Appreciate that the unsustainable tax breaks offered in PML-N’s sixth budget created provisions for revenue gap. It will come as no surprise to most readers that those measures may be reversed in the upcoming budget. Some respite has come from the superior judiciary, as taxes in telcos have been restored.
Given the current fiscal circumstances, unrealistic reliefs must go, even if people like me were the beneficiary of reduced tax slabs.
BRR: Which new areas do you think will see new or increased taxes?
AQS: The past two IMF programs saw GST increase by one percentage point in both instances. We may hear about GST harmonization again, and it may rise by one or two percentage points. As I have already pointed out, income tax reliefs announced in the last fiscal year will have to go. Petroleum levy may also see an increase considering the collection stays with the centre and is not shared with the federal divisible pool.
On the expenditure side, you may see cuts in planned large scale infrastructure projects. Those may be shelved for the time being.
I want to point out that these are assumptions; but there are few other avenues available to centre to collect taxes from. Final figures will depend on level of fiscal deficit negotiated. That will then be used as a benchmark to reverse engineer revenue targets and expenditure cuts. This has always been the case.
BRR: During the last two IMF programs, tax exemptions were removed to a large degree. It may prove hard to remove the remaining exemptions. Do you agree?
AQS: IMF needs to appreciate that the current government has taken almost all the much-needed unpopular decisions. If we intend to keep this economy from sinking into chaos, then we may agree on a destination, but the incumbents need to be afforded the flexibility of pacing and sequencing.
In the last IMF program, 16 waivers were granted to the PML-N government, most of which pertained to the same structural reforms that the PTI government now faces. Therefore, IMF will have to be realistic. Agree on fiscal targets for next three years, but with flexibility for the government to devise its own strategy to handle the political economic repercussions of those cuts.
The pressure issue from PM’s recent interaction with IMF chief in Beijing also spoke of a comprehensive reform package; any such package will have to include social safety net and poverty alleviation measures. If the IMF is too stubborn, it will be a lose-lose for both sides. Given Pakistan’s track record, the last thing the Fund would wish for is to initiate a tough program that fails to reach completion.
It has to be a realistic program which is politically sell-able.
BRR: Can you highlight important reforms needed urgently for the power sector?
AQS: First, the government needs to figure out how to continue targeted subsidies in the energy sector, given the current levels of circular debt. We may review East Asian and Latin American models to identify with surgical accuracy consumers in most need of subsidy. I must add that this is no easy job.
But price levels are only one side of the picture. Thirty percent of losses in T&D constitute in an equal opportunity injury to the national kitty. Similarly, unaccounted for losses in gas, if reduced, can also offer some relief to the consumer.
Third, we need to pivot towards renewables, especially in CPEC Phase II. We cannot continue to depend on fossil fuels for our electricity generation. We need to bring a three-year framework which sets annual stepped-up targets for introduction of renewables in national grid.
Incidentally, PTI’s mantra of ‘clean and green growth’ has been adopted by President Xi, who spoke of a ‘clean and green’ BRI along with sustainable development goals in the latest summit. Eventually we will need to move towards future technology with our international partners. Otherwise, dependence on fossil fuel can prove ruinous for Pakistan due to their inherent volatility and peg with foreign currency.
BRR: But as fresh power plants continue to come online, capacity charge continues to grow. How should those be passed on?
AQS: The obvious way to take advantage of excess capacity is to export energy through regional corridors. Since we have closed that option for the foreseeable future, the country needs to develop indigenous demand; otherwise, in the long run, capacity charges will kill the economy.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.