Govt must close political fronts, focus on economy

Opening of political fronts has complicated economic challenges

LAHORE: Pakistan’s economy has experienced several rounds of currency devaluation since December 2017, where the rupee has lost around 32% of its value against the US dollar.

Analysts expect the rupee to further weaken, gradually, till June 2019, since the government has not negotiated an International Monetary Fund (IMF) programme yet. This is based on a presumption that the IMF programme will bring in macroeconomic stability, which in turn will lead to stabilisation of the rupee.

The media is replete with the traditional argument that these rounds of devaluations will boost exports. Every passing month, export statistics are highlighted to prove the traditional argument. Unfortunately, these statistics are not helping since the growth in exports was around 2% in the first six months of FY19. Now, the next hope is that the fruits of devaluation will be picked in due course due to the lag effect.

Contrary to this argument, value-added exporters are not optimistic that these rounds of devaluation would have any positive effect on them. They are of the view that their inputs are mostly imported and their costs will eliminate the positive effects of devaluation.



Recent interactions with them have suggested that global buyers are smart enough to nullify the positive impact of devaluation. On the other hand, the impact of devaluation has started to penetrate the masses in some form.

For instance, paper has become expensive and traders have jacked up prices. The regulated price of liquefied petroleum gas (LPG) has created a black market, where its price is consistently higher than the regulated one.

Pharmaceutical companies have felt the pinch and have increased prices in the range of 10-24%. Other sectors will follow.

The only relief for the masses is the lower petroleum product prices at the moment. Frequent visits to friendly countries have provided some space to the government to keep the oil prices low. Fortuitously, the international crude oil prices and the upcoming deferred oil payment facility have also given space to the government to reduce the petroleum product prices to some extent.



As far as the case of double-digit inflation is concerned, it depends on the international crude oil prices. The current prices are around $54 per barrel. If oil prices come close to $80, then inflation would be in double digits. The higher petroleum prices will compel the transporters to raise bus fares and prices of essential food items will, in turn, increase.

The government administers prices of essential items through price control committees, which are headed by deputy commissioners at the district level. This administration of prices should be done in an effective manner, since that would be the key to control inflation going forward.

The government has borrowed from the friendly countries and borrowed time to negotiate with the IMF. Reports suggest that the IMF has asked for harsh fiscal, monetary and exchange rate adjustments in quick successions. Regarding fiscal adjustment, the government has already brought two mini-budgets.

Similarly, quick monetary adjustment has been done in the last five months and the discount rate has been increased to 10%. In addition, the exchange rate adjustment has already been done to a great extent.

In a nutshell, the government is trying to make these adjustments in an orderly and sequential manner, which has become a big challenge. Meanwhile, it has opened many political fronts, which are further complicating its economic challenges.

Under the current circumstances, a better advice to the government is to close unnecessary political fronts and focus on economic management.

The writer is an Assistant Professor of Economics at SDSB, Lahore University of Management Sciences (LUMS)

 

 

Published in The Express Tribune, January 28^th, 2019.

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