Economy plagued by devaluation and inflation

The fact that the pricing index is going up since a considerable time now is viewed with suspicion by analysts. They also express surprise at the unrelenting devaluation of Pakistani Rupee (PKR) as both these factors point out to some kind of manipulation by powerful invisible forces.

The rupee has taken hard beating over the last three years and has broken all reasonable levels where it was expected to stop losing its value at. Similarly, the unremitting surge of inflation is somewhat inexplicable particularly regarding price increase of sugar that is reportedly produced in abundance in the country by scores of sugar mills scattered over length and breadth of the land.

Already struggling to find ways to pay inflated utility bills, the people suffered another shock due to a further hike in the prices of different varieties of flour and all other edible items. On top of all, is the unremitting increase in fuel that badly affects the entire pricing structure of consumables.

The exchange rate volatility appears to be unending as the value of dollar has doubled in the last almost two and a half years and still the volatility has refused to subside strongly hinting at an inside job.

The rapid fall in the rupee’s value has eroded business confidence with the corporate sector has started revising prices on a daily and hourly basis, making it difficult for retailers and end-users to absorb quick price shocks. This is contracting demand on the one hand and pushing up inflation on the other.

The story gets complicated when viewed in the backdrop of the pressure exerted by the IMF that has contributed to exorbitant rise in the payable amounts of utility bills particularly of electricity that has caused widespread spate of protests in the country with businesses keeping their shutters down.

It is now very clear that serious malfunctions on the balance of payments and fiscal accounts are playing havoc with the economy and any chance of putting the economy back on the path of recovery is less.

This lack of balance is directly increasing pressure on interest rate along with fuelling inflation, a situation that is inexplicable a phenomenon as interest rate increase curbs inflation. The result is that incessant rounds of devaluation are failing to arrest or dissipate the pressure because the underlying movements keep producing more pressure even after every devaluation.

Most worryingly there is no market-based exchange rate at the moment in Pakistan because the market itself is broken as it is badly starved of dollars and is also cornered by the state as the largest claimant of all freshly created domestic liquidity. It is pointed out that monetary operations alone that include hiking interest rates and devaluing the rupee will not be enough to arrest this trend unless they are accompanied by fresh inflows of foreign exchange and a sharp contraction in the fiscal account.

Both these factors appear very distant at the moment and the state may not be able to handle this situation with the kind of policies it is following. However, the IMF is emphasising that the state should mobilise a massive tax effort on a scale not undertaken before. In this context, the IMF is in the process of discussing the performance of the FBR and revenue measures taken including further tax measures. It is pointed out that reviewing revenue collection performance is part of the IMF Stand-By Arrangement and is also included in the country’s economic stabilisation programme.

FBR is already under tremendous pressure to begin the process of collection of revenue right from the outset and this effort may start with functional alterations within the makeup of the revenue generating outfit. This certainly is a tall order as the Pakistani taxation machinery is considered functionally unable to improve its performance as is borne out by its performance over the years even under the watchful eye of the IMF.

This is pretty bad news for the wobbly caretaker administration whose finance minister professed her helplessness right at the outset pointing out the sheer inadequacy of the governing team. Intriguingly, she was compelled to issue a clarifying statement laden with platitudes particularly emphasising how honoured she was for serving the country. The worrying aspect of her comments is that the economic situation is so perilous that even a seasoned economic expert as the incumbent finance minister is expressing her sense of helplessness. She is not the lonely member of the caretaker cabinet that is feeling the intense discomfiture about the economic difficulties the country is in.

Despite all the bravado exhibited by the caretaker PM about providing relief to the people heavily burdened by high utility bills but the fact is that it may come to nothing as it is reported that the IMF has sought time to review the financial impact of the proposal on the circular debt budgeted power subsidies and the overall primary budget surplus target of 0.4% of GDP Pakistan proposed that the bills would be recovered from October 2023 to March 2024.

Pakistani authorities assured the IMF that they would abide by the agreement approved by the IMF board in July and this would be temporary relief having no major financial impact. The IMF was assured that the power subsidies would not cross from the annual level of Rs.976 billion.

Under the IMF programme, Pakistan has committed to increase electricity prices on account of annual revision. As a result, the maximum per unit price for domestic consumers is now Rs.51 per unit, while for industrial and commercial consumers, it is Rs.47 per unit. The government had also planned to increase prices by Rs.4.37 per unit on account of last fiscal year’s quarterly tariff adjustment.

In this context it is reported that Pakistan had informed the IMF that there would not be any blockage in payments to power producers despite recovering the bills in six tranches. The shortfalls in the power distribution companies’ revenues would be offset by taking commercial loans. The interest on the commercial loans would either be picked by improving recoveries or paying from the budgeted subsidies. It was claimed that the financial impact of dividing the bills over six months would be less than Rs.10 billion. The caretaker cabinet did not approve the request due to incomplete work and lack of endorsement by the IMF.

It was however reported that the IMF team had concerns that the concerned Pakistani government department might not be able to achieve what it was claiming at this stage as it has a history of missing their targets agreed with the IMF. Despite recovering the inflated bills in instalments, the people’s burden will not be lessened as they would be forced to pay their regular bills along with the instalments of the bills for the month of August.

It was also proposed by the officials that the electricity bills of the consumers having monthly consumption of up to 400 units should be recovered in instalments. There were 31.4 million or 81% of the total consumers that fall within the consumption level of 400 units. It was also reported that the officials had passed two months’ increases in the monthly bills of August which resulted in effectively up to Rs.16 per unit increase for some categories of the consumers.