IT is here and it is blowing up on them massively now. The double tsunami of inflation and a rising trade deficit blew its bounds in the month of November and there are no indications yet that we have hit the peak. Faced with this situation, they are now increasingly wearing a haggard look and getting testy in their temperament. They have every reason to. The road ahead is a tough one, and the circumstances anything but conducive to decisive decision-making.
Monday was a telling day in this regard. The market demanded its pound of flesh from the government in an auction of long-term bonds where three- and five-year papers saw a jump of more than two percentage points in their yields. In the last auction, they had rejected all bids for demanding too much. This time they were forced to bow.
That same day, the State Bank and the finance ministry issued a ‘clarification’ each, targeting articles published in the newspapers. The finance ministry claimed they are not in a state of panic, and the State Bank claimed it was not asleep at the switch all along, to put it succinctly, because that is what the articles they were responding to had broadly argued. Fair enough. But we are entitled to then ask, when exactly did you gentlemen see the November bombshell approaching?
On Tuesday, the inflation data for November was accidentally released a day early, only to be hastily withdrawn, and released again a day later. I know that potato is hot, but can we at least not keep fumbling it in public! The data painted a dire picture. Inflation beat all expectations in November to come in at 11.5 per cent while the sensitive price indicator and the wholesale price index showed stupendous rises, coming in at 18.1pc and 27pc respectively. Across the board, all indicators and all categories of goods and services whose prices are measured by the government are surging. We now have sharp and broad-based growth in inflation with the promise of more to come. The target of keeping inflation between 7pc and 9pc has already been crossed, unless it comes down rapidly in the months ahead.
In the days to come, they will find themselves rolling a lot of things back.
Wednesday brought another blowout. In another auction of government debt, this one in short-term paper, yields demanded by the market jumped by three percentage points in papers with six-month maturity. In the last auction, bids far below this were rejected, presumably in the expectation that time would temper the markets’ greed. The exact opposite has happened and now the State Bank looks like it is racing to catch up with the markets rather than leading them. Markets are pricing in massive rate hikes beyond the three-month horizon and the State Bank seems to be acquiescing.
For months they vacillated as the pressures built up. And now as the whole thing is blowing up on them, they are reacting to terms set by the market and angrily trying to swat away pesky commentary in the media. It would have been better if they had been more forthright in their public pronouncements during the months these pressures were mounting, but given that they — the finance ministry and the State Bank — are serving a government not famous for its high-quality decision-making or keenness to look reality in the face — they played ball while the game rolled on.
Notice one thing. The petrol price notification issued yesterday did not contain any of the congratulatory language that is usually there when the price is left unchanged. Why not? Because the summary from the regulator, where these determinations are usually made, actually called for a substantial reduction in the retail price of fuel due to a fall in the import price. Instead, the government kept this benefit to itself by levying further taxes on the fuel. There was little choice of course. The absence of any taxes on fuels was never a sustainable solution, and now they have no choice but to roll it all back.
In the days to come, they will find themselves rolling a lot of things back. The hikes in the discount rate will place a heavy burden on the government debt service expenditure, which will require more taxes. The November bombshell has landed the government in the middle of a vicious circle and navigating this from here on will be their chief challenge.
At the moment, getting onto the IMF programme is their primary focus and getting there will not be easy. The real game begins afterwards though. Keeping the fiscal targets in place in the face of rising interest rates, rebuilding reserves in the face of rising borrowing and keeping the exchange rate relatively stable with State Bank autonomy while meeting monetary targets of the programme will be difficult. We should expect, and brace for, a tsunami of excuses and a hi-octane blame game as the government starts to walk down that road.
In the meantime, it is becoming increasingly critical for some to start levelling with us. We didn’t get here in a few months, and it will take a little more than a few months to get out. The pressures that led to the November bombshell are long in the making. In fact, they are the flip side of the growth that Shaukat Tarin and Reza Baqir have both touted with some enthusiasm. Less than six months after setting a growth target of 5pc for itself in the budget, Tarin is now telling us that the economy cannot grow at this rate without overheating. One hopes he didn’t learn this the hard way, because much commentary around the time the budget was announced (including, might I add, by yours truly) was pointing this out back then.
I tell students to never buy a growth story in Pakistan that is unaccompanied by reform. May I please now ask Mr Tarin and Dr Baqir to never again sell a growth story that is unaccompanied by reform?
The writer is a business and economy journalist.
Published in Dawn, December 2nd, 2021