The latest monetary policy is out for another two months and it continues to belie all logic: The discount rate has been maintained at 13.25% ostensibly to tackle the menace of (still) a rising inflation. A bit surprising or rather baffling, as one has been told that imports have shrunk significantly (the main driver of inflation post devaluation) so naturally the local product substitutions should cost less, oil prices are consistently under pressure and in grip of a bearish global trend (oil being one of the principal inflation drivers in Pakistan) and last but not least that Pakistan is flourishing on the scale of ‘Ease of doing business’, something that one presumes should ultimately translate into low costs in general? Unless of course when it comes to inflation, the state is its own worst enemy. Meaning, the tools it is using to control damage are in fact causing the most damage. An unrealistically high interest rate cost is largely driving up the cost of doing business amidst an environment where working capital/cash requirements of businesses have gone up manifolds owing to some poorly thought through governmental policies on taxation (mainly the excessive slab of the general sales tax @ 17%, which needs to be somehow absorbed in domestic sales while in exports the refund mechanism still remains a victim of uncertainty); devaluation per se; and abrupt increases in utility prices without allowing the business operations any kind of adjustment period. A Management-101 lesson will tell you that once upheaval and uncertainty on revenue policy creeps in, businesses invariably respond by invoking the preemptive, albeit short-sighted, survival mechanism based on price increases - And then kicks in a vicious cycle of stubborn inflation fueled through supply side pressures!

As already hinted above, the correlation between interest rate and inflation in Pakistan may not be a simple textbook explanation. The country has its own peculiar ground realities and to truly understand the relationship between high interest rates and inflation-control in Pakistan, if any, one needs to first understand the real drivers of inflation in the Pakistani economy and whether or not there exists a real time leverage of interest rates on spending (by Pakistanis) or for that matter on influencing the overall domestic aggregate demand. To look at the recent inflationary phenomenon in Pakistan strictly through the Western prism may be a mistake to begin with. General international upward inflation cycles are caused mostly by rise in energy prices, rising wages despite low productivity (for example due to strong trade unions in the West in the 70s) or by sheer international events like say a global increase in food prices or due to unnecessary trade wars, like the one we are currently witnessing between China & the United States. As we have seen that none of these strictly apply to Pakistan’s inflationary waves (now or in the past), because monetary tightening in the traditional sense just does not work here. Pakistani economy does not operate in the typical credit entrenched way the western economies do and excessive raises in the discount rate will only end up further distorting the supply side dynamics with little success in taming core inflation. Also, there is no real weightage of wages in inflation at home, since the local wages in absolute terms are already very low and only form a very small fraction of overall manufacturing costs.

Likewise, even the present inflation is not in any way being stoked by typical textbook factors, but instead is being driven by elements like: A devaluing currency in an economy that is heavily reliant on imports of a fairly inelastic nature; An ambitious and fast track revenue drive by the government (meaning not only have the taxes gone up, but have done so instantaneously with little regard to comparative regional tax levels); and Due to a rapid and steep rise in cost of borrowing for local manufacturing that is naturally now reflecting in the end prices for the consumers. Perhaps, it may not be appropriate to argue that inflation today is in effect largely the cause of government’s own operational inefficiencies!

So what really are these governmental operational inefficiencies? Structuring a pragmatic revenue drive has been a weakness, which has resulted in eroding the confidence in the markets – confidence cum perception, as any management guru will tell you, is the key to success in every economic endeavor. Instead of undertaking mature and prudent reforms vis-à-vis revenue collection (FBR, legalities, defining sector al sensitivities, prioritizing, etc.) what one has come across is clever rhetoric on how smart the new managers are without realizing that it is not about branding the revenue generators as thieves but about productively partnering them in winning their trust and expanding the pot. Devising a taxation framework is serious business and requires a visionary rather than an accountancy approach. Anyone who really understands this knows that the deliberately left loopholes, breaks, caveats or relaxations for the taxpayers are in essence left there to incentivize them! No rocket science involved in claiming to have identified them and then taking the credit to have plugged the loopholes, because what has really been done is to kill the enabling environment. Also, successful taxation drives entail reciprocity and trust: Now who would trust the exchequer when despite an apparent governmental focus on exports and its repeated promises, the exporters, 5 months down the road, still await the refund of their own money invested in the new value added regime? Economic governance is a subtle art where sometimes you have to choose to ignore, especially when stubbornness could carry financial costs and pain. Years back in the human resource class we were explained why the US authorities deliberately looks the other way when the illegal Mexican labor comes in during the harvesting season, because their absence could undermine the very prospects of US agriculture in produces such as citrus, cotton, peanuts and others. Especially when it comes to food essentials a good economic manager always actively monitors the situation, thereby allowing, when necessary, a cross border trickle-in to ensure adequacy in supplies and to keep a cap on domestic prices. This is precisely how it has also always happened here in Pakistan, to consciously let onions, potatoes, lentils, tomatoes, etc. slip in when one could see a shortage coming – that is to manage supplies and keep prices stable. Inflexible positions invariably lead to situations like the present crisis we are witnessing in shape of unwarranted market prices of tomatoes and green peas. Finally, some of the human resource choices have been simply appalling and clarity on important initiatives seems to be missing. For example, one is not too sure whether the government views CPEC as a political cum security undertaking or a financial cum development undertaking. If as the latter, then one can take no real solace in Chinese Ambassador’s generosity that China will not ask for its debt repayment on CPEC if Pakistan is not in a position to do so, since one’s concern would rather be on why be in such a position in the first place?

Well, the above in no way implies that there is all gloom and doom. In all fairness, the government over the last couple of months has done reasonably well on quite a few indicators, rationalizing the current account deficit, stabilizing the Pak Rupee and bringing some buoyancy back into the stock market, however, the its real goal should be to expand economic activity and not contract it. The stability it is so proudly touting should now quickly translate into employment generation and equitable growth. Even by conservative estimates in these last twelve months nearly 0.80 to 1.0 million Pakistanis have lost their jobs and nearly 4 to 5 million Pakistanis have dropped below the poverty line – We certainly don’t want an Egypt in Pakistan!