THREE days before the prime minister met with the managing director of the IMF in Dubai, an unusual statement was made after a cabinet meeting. The meeting in question was held on Thursday, Feb 7 and immediately after it, Information Minister Fawad Chaudhry held a press conference to apprise the press corps of what all was discussed.
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In his remarks, Chaudhry laid great emphasis on the price hike, listed all the items of daily use whose prices had come down in the opening months of the PTI government, contrasted this with the opening months of the PML-N government in 2013, and was questioned heavily by the press on the gas prices issue, in which he pointed to the rising debt of the publicly owned gas companies for which he again laid the blame on the preceding government. Then he was asked about defence expenditure, and whether his government intends to make the defence establishment share the burden in expenditure cuts that had also been discussed during the press conference.
His response was categorical: no! He told the reporters that the matter had been discussed in the cabinet meeting, and it was decided that there will be no cuts in defence spending, rather the opposite. The government believed it was necessary to find ways to, in fact, increase these expenditures. “The country’s defence budget is already low as compared to other states in the region, and therefore it should be increased”, he was quoted as saying.“We want to increase our defence and security; therefore we need to increase our defence budget and for that purpose we want to generate more revenue.”
There is one obvious reason why defence expenditures would be under discussion at the cabinet level days before a scheduled meeting between the prime minister and the managing director of the IMF: budget cuts are on the way. The information minister’s remarks provide the best context when one wonders why this government has taken such a long, torturous, meandering, and highly conflicted route to the IMF.
The period of indecision and vacillation has to end and a period of decisive policy action has to begin.
Officially, Pakistan approached the IMF for assistance on Oct 11 last year, when the finance minister met with the IMF chief in Bali, Indonesia. “During the meeting, [Pakistan] requested financial assistance from the IMF to help address Pakistan’s economic challenges,” said a press release issued by the managing director’s office after that meeting.
But unofficially, or in reality, the request for help can be said to have been delivered in earnest on Feb 10, when the prime minister himself entered the dialogue, and following the meeting acknowledged “the need to carry out deep structural reforms” in a tweet. For her part, the managing director called for “decisive policies and a strong package of economic reforms” in order to proceed.
So, two things are now clear. The period of indecision and vacillation has to end and a period of decisive policy action has to begin. The policy action is described by the prime minister as ‘deep’ and by the MD as ‘strong’. In unofficial comments given to the press, without attribution, senior members of the finance team involved in the negotiations have said that the path ahead involves ‘tough political choices’.
What are those tough political choices? The information minister’s press conference given days before the meeting provides an important clue. Clearly, the cabinet is worried about the impact that prices of essential goods are having on the common citizenry. Inflation has risen to a four-year high as of January data, and this is despite no large increases in the price of fuel, especially diesel, which was specifically mentioned by the information minister in his press conference.
Fuel prices have traditionally been important drivers of food inflation in Pakistan, and if the Consumer Price Index (CPI) is rising without any fuel price hikes, mainly because the price of crude oil has dropped sharply in international markets since September, then clearly the economy is pregnant with worrying levels of inflationary pressure.
First quarter of this fiscal year saw the CPI rise to 5.6 per cent, the highest quarterly inflation since Q1 of fiscal year 2015, according to the State Bank. But that was, at least partially, in response to higher oil prices. Since then, oil prices stabilised at the pump, yet by January inflation surged to 7.2pc, driven largely by non-food items but some food items like tomatoes also saw price surges.
This worries the government because in large part the deep or strong policy reform they have committed to at the highest level involves bridging the fiscal deficit. Revenues have already fallen far behind, almost Rs190bn short of their target in the first seven months, and continuing. Meanwhile, expenditure cuts have been made on the development side, but current expenditures show no sign of abating.
The fastest growing item in current expenditures is defence, which have grown by more than 20pc in the first quarter where the overall budgeted increase for the full fiscal year is 10pc. With revenues lagging and current expenditures marching on, the government has resorted to printing money on a massive scale to keep public finances going. As of Feb 1, the total outstanding stock of government borrowing from the State Bank stood at Rs7.476 trillion, an increase of Rs3.862tr since July 1.
Now connect the dots. If the outstanding stock is not brought down it will fuel inflation. In order to bring it down, the government will need to cut expenditures, or raise taxes. There is very little room left to cut expenditures, unless they’re willing to touch defence, which they have publicly said they will not do. Raising taxes, in a hurry, means taxing fuels, which will spur food inflation. Not taking a decision is not an option either, now that an authority no less than the prime minister himself has committed his government to it.
Nothing tests a government’s mettle better than having to make ‘tough political choices’. We will soon see the mettle that Imran Khan’s leadership is made of.
The writer is a member of staff.
Published in Dawn, February 14th, 2019