Policy Rate and Oil Subsidy - II - Business Recorder

Policy Rate and Oil Subsidy – II – Business Recorder

Therefore, this increase in policy is likely to do a lot of damage to the effect of the bottom-up approach adopted by the previous government since the beginning of the pandemic. It would also undermine the facilitative role of SBP in this regard.

Meanwhile, the IMF remained firm on the government’s insistence on removing oil and energy subsidies, as outlined in its May 25 closing discussion statement, in which the Panel emphasized the urgency of taking concrete political action, including in the context of eliminating subsidies. Fuel and energy and the budget for the fiscal year 2023 to achieve the objectives of the program.

Hence, the removal of oil and energy subsidies, along with external monetary tightening, would likely feed strong inflationary consequences for an economy that has been experiencing overall growth and slight growth for only two years.

The IMF and government will both need to understand that developing countries in general have already reached the limits of using macroeconomic policy tools for a number of months now.

So, what is required is that rich and developed countries and multilateral institutions should provide developing countries with meaningful debt relief and financing, so that their fiscal and balance of payments issues can be adequately addressed by allowing them to follow non-austerity/cyclicality. Policies needed to achieve sustainable macroeconomic stability, economic recovery, and where economic growth is purposefully inclusive.

Here, it must be remembered that this growth momentum was achieved on the back of the large growth sacrifice made to achieve pre-pandemic macroeconomic stability under the IMF program negotiated in the early years of the previous government, and through countercyclical policies (including in it rate cut policy).

Policy rate and oil subsidy – I

Moreover, this growth momentum was also underpinned by stimulus (albeit a few) that were provided during most of the first two years of the pandemic along with some fiscal space created by some debt defaults, and only $2.75 billion in the enhanced SDR allocation.

Hence, it makes no sense to roll back the counter-cycle policies when they have led in the first place to protect against a deep and prolonged recession, and then a good economic recovery over the past two years, only because of the lack of significant debt relief, and the strengthening of SDR allocation thus far. This increasing rate of politics, contrary to the facts on the ground, is a reality.

There is a need to accommodate the internal realization that growth must be broad-based to reduce rising inequality, as discussed above, through the continuation of counter-cyclical policies. There is also a need to make a greater effort to attract more funding.

The situation requires much more debt relief than has been provided so far. The opposite set of policies is likely to lead to fuel inflation, mainly in the form of cost-push inflation, which in turn is likely to lead to an increase in the rate of policy and with it the cost of borrowing and debt repayment burden along with an increase in poverty and inequality.

It is quite unfortunate that while there are clear indications that the growth momentum has been achieved through non-austerity/counter-cyclical policies, including the policy of maintaining a good lose-lose monetary policy, the acting governor of the Social Investment Bank described it as “ unplanned. ‘Financial expansion this year’.

Here, although the governor may mean this expansion as more than just subsidies, including in the case of oil subsidies in particular, former Finance Minister Shaukat Tarin has explained on more than one occasion how oil subsidies were backed by Pakistani financial sources, and That in their discussions with the government at the time, the IMF approved this government support plan.

The problem is that even if the stimulus/support plan is hard to manage — including facing a tough fiscal deficit that drops somewhere between 6 percent to 7 percent of GDP, during the current fiscal year — the over-tightening of policies Cash, which is appropriate. A number of months now, and where the policy rate needs to be cut well below double digits, cutting/eliminating subsidies and following a pro-cyclical policy stance will not only take growth away from the current (hard-earned) momentum, but the pressures are likely to increase Inflationary inflation beyond the very short run.

Also, the much-needed bottom-up approach to making current growth more inclusive, which needs to be built on where the previous government left, will effectively evaporate and cause more inequality and poverty, with a potential increase in political instability.

Moreover, by insisting that Pakistan should remove oil and energy subsidies, instead of working to move the enhanced SDR allocation from last August, from rich and developed countries to developing countries, under the window of the ‘Resilience and Sustainability Fund’ (RST) of the International Monetary Fund, the International Monetary Fund has shown poor understanding of the important role of these subsidies in the growth and inflationary consequences of Pakistan’s economy, not to mention poverty, inequality and even in relation to the potential increase in political instability in the country.

Excessive monetary tightening will not only likely increase cost-push inflation, but also increase the debt burden, which is already high. Also, a higher interest rate – which is already unnecessary and should be well below the double-digit mark – is likely to put pressure on the government’s fiscal space to provide a real and much-needed level of oil subsidies to maintain growth momentum and public health investment.

Moreover, addressing balance of payments concerns by raising interest rates is already undesirable because it is important to protect this part of the import demand that is important for growth in general.

Here, the higher cost of capital for making imports that contribute to growth is likely to reduce the volume of these imports and will also increase cost-push inflation in the country, which in turn will also reduce the already weak level of overall growth. Instead, import demand should be restricted in a very purposeful way by expanding the negative list (of more elastic luxury goods), and increasing tariffs on other less elastic goods that still fall under non-essential items.

Meanwhile, the balance of payments pressure should be managed with more efforts in terms of obtaining certain debt moratorium/relief, and attracting higher financing, especially with regard to transferable SDRs.

Here, a related aspect of oil subsidies should also be mentioned, as suggested by some economic analysts that only or mostly a highly targeted level of oil subsidies are provided to motorcyclists and owners of tube wells.

Although she points out that as an alternative to providing subsidized oil to motorcyclists on petrol pumps, and rightly so, given that it is very difficult and expensive to monitor, the targeted subsidies are given to these two groups based on a database of people with motorcycles and tube wells, which is available to the government according to surveys conducted in recent years, however, these databases will first suffer from a time lag with regard to the actual situation of ownership, not to mention the fact that people who own small cars also fall into a similar income category and need support, in addition to issues Institutional capacity/opportunities for corruption that exist in obtaining this support to reach the eligible person.

Having said that, oil subsidies should be introduced in terms of lower petroleum product prices (these cuts happen rationally) across the board, given that oil prices are largely fueling cost-push inflation in most parts of the economy, including electricity generation.

Following the Rs 30 per liter price increase for POL products, Prime Minister Shahbaz Sharif announced a targeted subsidy to mitigate the impact of this increase in the form of, firstly, Rs 2,000 for BISP registered persons, who number one third. Of the total population, secondly, availability of 10 kg bag of flour in utility stores at subsidized rate of Rs 400 per bag.

This target support falls below the potential inflationary impact of such a spike in oil prices, virtually across the economy, given that inflation is already at a high level of 13.4 percent. High inflation along with the high level of the policy rate at 13.75 percent is likely to cause a lot of cost-push inflation, causing slowdown in overall growth, particularly exports and with it foreign exchange reserves, which in turn will put more pressure. On the currency, and with it the accumulation of more imported inflation.

Not only will this usher in a new cycle of inflation-chasing policy rates, if the trend for months is any indication, but it is also likely to increase inequality and poverty on the one hand, and political instability on the other. Therefore, it was better to provide a reasonable public level of oil subsidies, rather than face a higher cost of borrowing, an increased level of debt burden, and a loss in production.

(is over)

Copyright Business Recorder, 2022

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