Minister for Finance Ishaq Dar has warned of higher inflation in the coming months. At the same time, global food prices are falling. These are two contradictory trends but we have been seeing them for a long time in Pakistan. Oil prices have been falling for over a year, yet the Pakistani consumer has not seen any respite.
There have been sharp drops in the prices of dairy products and vegetable oils globally. Why Pakistan wont see relief filtering into is economy is because, according to the Minister, the provinces could not generate a surplus as agreed, which led to missing the Quantitative Performance Criteria of the IMF on the fiscal deficit and government borrowing from the State Bank. In the same breath the Minister argued that Pakistan’s economy continues to improve. Low oil prices, planned improvements in the domestic energy supply, and investment related to the China-Pakistan Economic Corridor have all helped inflation drop to 1.8 percent, but is expected to increase in the coming months.
The common man can’t make sense of the situation. The signals being given are that the economy is performing well, yet is suffering; we are meeting all the IMF targets, yet inflation will continue and there is no dent made in the debt we hold; GDP is increasing, yet we still need tranches of millions of dollars to be loaded into our economy. The problem at the core is simply that the government is spending more than it is making, even with the IMF injections. The solution is obvious to stop spending and start taxing (a contraction). Though this may seem intuitive, contraction is not helping.
At over 60 per cent of GDP, public debt in Pakistan remains high and nearly 40 per cent of federal spending is devoted to interest payments. Cutting welfare programs and increasing taxes is retarding wealth generation by private enterprises. It is time to take a risk and stop contracting. The government must spend on infrastructure and job creation. If an enterprise is not profitable, say the Steel Mills, privatise it. If it is profitable, expand it. Reduce untargeted energy subsidies, which disproportionately benefit the wealthier segments of society, and raises tax revenue by the continued removal of tax exemptions. Increases allocations for social assistance and development expenditure, if sustained over time will increase employment and GDP. If we continue to only focus on debt finance and the budget deficit, we lose our money in an endless circle. We have seen no advantage from the fall in oil process, not in our energy sector nor in our food prices. With the current neo-liberal IMF led setup, we never will.