Pakistan has been in the grips of low economic growth, high inflation, and high debt distress. For this, the country paid a lot of growth sacrifice at the back of a high policy rate, kept up to control inflation. Firstly, the sacrifice that was paid was a lot more than it should have been because inflation is determined by not just aggregate demand squeeze policies, but also by supply-side policy emphasis, both through better incentive-, and governance structures.
Secondly, now that inflation had finally come down from the highs of close to 40 percent, and closer to single digits– a little below 12 percent currently– the federal budget that has been announced is likely to increase inflation, and the high cost of capital reflected in the budget in terms of a substantial amount of interest payments budgeted– around 57 percent of the total current expenditure earmarked in this regard– along with significant increase in indirect taxes, and petroleum levy– increased by Rs 20 per litre on petrol, and diesel, reportedly– all but likely to increase inflation, and reduce economic growth.
Highlighting a likely substantial increase in taxes in the next fiscal year, a recent Bloomberg published article ‘Pakistan hikes taxes in budget as it prepares for new IMF loan’ pointed out ‘The government plans to increase tax revenue by 40% to 13 trillion rupees ($47 billion) in the fiscal year starting July 1, the finance minister said. This will help it achieve a 1% federal primary balance, which is the difference between revenues and expenditures excluding interest payments on debt. …Rising taxes may fuel discontent among consumers and businesses, who are already contending with painful energy costs and Asia’s highest inflation rate of more than 11%.’
This is likely to have an increasing impact on the already high level of poverty, and income inequality, not to mention likely negative impact on an already weak political voice, given the lack of fiscal space on account of high interest payments, and low growth would not allow much-needed increase in welfare spending. Moreover, lack of fiscal space, and overall weak level of multilateral spirit, will also have a reducing impact on the already low level of climate related spending.
In fact, the second stated objective of the 2024-25 budget, which is ‘Bringing public debt to GDP ratio to sustainable levels’ requires a non-austerity policy approach, given the policy of keeping high policy rate to reduce inflation, has substantially increased debt distress, and when clearly over-board austerity policies have seriously hurt economic growth, inflation, and debt sustainability prospects over the years.
Looking at the ‘Budget in brief’ document, released by the Ministry of Finance, one finds that the policymakers have not learnt much from the negative impact of following austerity or fiscal consolidation policy, especially in the procyclical way. The statement is the first objective for the 2024-25 budget, which is ‘Economic stability and growth through fiscal consolidation and efficient use of public money.’
Just to look at the last four years, where the policy rate was only decreased around the start of this decade, and only a second time recently, but still inflation, not only saw a large increase during this time, but also remained quite stubborn. This clearly indicated that inflation had a strong supply-side determinacy, and was not primarily influenced through aggregate demand side policies. So, the role of cost-push-, and imported inflationary channels, in addition to global aggregate supply shock, and the rise in geopolitical conflict, all had a telling impact on inflation.
With regard to keeping tight monetary policy stance for a long time, a recent article ‘Pakistan cuts interest rate for the first time in four years’ published by Bloomberg pointed out ‘Pakistan’s central bank lowered its benchmark rate by a bigger margin than expected, the first reduction in four years, after consumer prices eased in the South Asian nation.’
Hence, instead of achieving this objective through fiscal consolidation, or monetary- and fiscal austerity policies, the government should control inflation, increase investment, and in turn, economic growth through a more balanced, aggregate demand- and supply-side policies, and that too in a counter-cyclical way, so that economic growth, and macroeconomic stability is place on sustainable footing.
In fact, the second stated objective of the 2024-25 budget, which is ‘Bringing public debt to GDP ratio to sustainable levels’ requires a non-austerity policy approach, given the policy of keeping high policy rate to reduce inflation, has substantially increased debt distress, and when clearly over-board austerity policies have seriously hurt economic growth, inflation, and debt sustainability prospects over the years.
