EDITORIAL (September 25 2008): The "Indigenous Package" unveiled by Finance Minister Naveed Qamar in a press conference last week contains most of the elements of a sound stabilisation programme to pull the economy out of a bad patch. In a rare move, removal of all subsidies on petroleum products was announced, while power sector would be made subsidy-free by June, 2009.
The Finance Minister also referred to an upward revision in import duty on 350 items, besides raising the letter of credit (LC) margin for a fairly large number of items and asserted that the economic situation demanded further harsh steps to discourage import of luxurious or non-productive items.
On the fiscal front, the government would stick to the budget deficit target of 4.7 percent of GDP by cutting down the current expenditures and development budget. Without elaborating in detail, the Finance Minister said that various measures had been proposed to reduce government spending.
Terming the financing of the budget an important part of the package, Naveed Qamar revealed that the government had decided not to borrow from the central bank as it triggered inflation in the country.
Instead, the government would rely more on National Saving Schemes, commercial papers and Pakistan Investment Bonds for financing the budget deficit. Besides, the government would continue to pursue the policy of privatising state-run firms in the oil and gas sector despite turmoil in the domestic and international markets.
Negating the impression that the economic stabilisation programme of the government was formulated by the IMF or it was a shadow plan, the minister categorically stated that ours was an absolutely home-made programme which was prepared much before the arrival of the recent IMF mission. Nonetheless, their advice was sought to pull the beleaguered economy out of crisis and the country had no intention to go to the IMF to seek financial assistance.
The PPP government, according to Naveed Qamar, had inherited the present economic crisis due to the wrongdoings in the last one decade but we were up to the job to resolve the problems in the shortest possible span of time.
The State Bank Governor, who was present at the press conference, had to face a barrage of questions on monetary policy and foreign exchange reserves of the country. She explained that the monetary policy was tightened by announcing a host of measures but it had so far not worked very effectively because aggregate demand in the economy had been very high.
On the worsening rupee-dollar parity, the Governor admitted that it was a reflection of the health of macroeconomic indicators and the currency would appreciate once these indicators showed a healthy improvement. It was also revealed that the central bank had agreed to maintain minimum level of foreign exchange reserves, enough to cater for the import requirements of two-and-a-half months.
However, the Governor refused to divulge the minimum level of reserves to be maintained, saying that it entirely depended on the level of imports. In the absence of a detailed policy framework, it is difficult to comment comprehensively on the stabilisation programme envisaged by the government, but, broadly speaking, it contains all the right initiatives to restore the deteriorating health of the economy as reflected in the worsening macroeconomic indictors.
It is also true that most of the problems now confronted by the PPP government are due to the mismanagement of the economy in the last one year or so by the Musharraf-Shaukat government when it decided not to take harsh policy decisions for reasons of political expediency. Now, the authorities at the helm have to pick up the pieces and administer high doses of bitter pills to save the situation from worsening further.
All the measures stipulated in the economic package like complete withdrawal of subsidies on some of the major items, higher import duties, curtailment of budget expenditures and a stringent monetary policy are undoubtedly harsh and would evoke a great degree of criticism but were necessary for bringing about macroeconomic stability, narrowing down the fiscal and current account deficits and minimising pressure on the rupee rate and foreign exchange reserves of the country.
If the authorities had refused to recognise the reality at this juncture and shied away from taking these unpopular measures, the economy of the country would have destabilised further and the pain of adjustment in the subsequent period would have been more severe.
However, seen closely, while most of the measures would have an impact on economic indicators and the life of the people, removal of subsidies on petroleum products at this stage does not seem to be such a big move. There is an element of cross-subsidy on some POL products but overall the government has already managed to bring down the subsidy to zero level on all petroleum products.
Therefore, not much needs to be done in this area for the present. The real test from now onwards would, nonetheless, be to pass on the whole impact of the rise in international oil prices to end consumers in the domestic market if the situation warranted so. Also, it needs to be understood by both the supporters and the critics of the government that such policy frameworks pre-suppose peace and tranquillity in the country.
If the security situation in the country deteriorates further and tension in FATA continues to be high, efforts of the government to stabilise the economy and improve its macroeconomic indicators would not yield the desired results for obvious reasons.
However, while appreciating the measures contained in the economic policy package, we fail to understand repeated assertions of the government not to negotiate a programme with the IMF. The government, we believe, needs to have a balanced view, and reconsider its allergic attitude towards the Fund.
The government and the IMF may not have exactly the same prescriptions to pull the economy out of the quagmire but most of the measures contemplated under the home grown programme would not appear to be very much different than those likely to be prescribed by the IMF at this juncture. Also, as is well known, IMF staff is always open to negotiations and waivers from conditionalities in emergencies.
Besides, a negotiated and agreed stabilisation programme with the Fund would ensure flow of its resources at a low cost, give the much needed confidence to the investors and encourage other IFIs to be more generous to the country. Therefore, there is no harm in keeping all the options on the table.
