- Monetary policy alone will not reduce inflation
Now that the first hundred days of economic fire-fighting are over, it is time for PTI led government to vigorously start implementing its deeper economic vision as indicated in its Manifesto, with regard to reforming key economic institutions including the tax agencies, creating jobs, and upgrading welfare benefits, among other policies, to overall deal with the issue of poverty. As indicated in the first part of this article series, these are organisations indicated in the Manifesto and not institutions, as per heterodox institutional economics literature.
The exchequer is bleeding fast and heavy on account of incurring losses of public sector enterprises. The government has indicated that it intends to privatise only those of the enterprises that hold lesser strategic importance. For those and others that the government does not wish to privatise, all require that a) completion of work on the proposed sovereign wealth fund, and making appointments with regard to the board of governors (BOGs), b) organisational structures with regard to governance and incentives are quickly formulated with the assistance of a core technical group- hired soon after by the BOGs, c) labour market realities are assessed and reported on to become ready for fresh hiring where needed, d) augmented terms of reference of responsibilities re-drafted for existing employees where needed, e) wage boards are tasked for obtaining recommendations for rationalizing pay and benefits of employees, and f) establishing a monitoring mechanism to keep track of progress and objectives achieved.
The government is rightly taking away policy formulation mandate from Federal Board of Revenue (FBR), retaining with it the primary responsibility of implementing tax compliance. Moreover, the government with regard to public resource mobilisation should march on with other steps it mentioned to take in its Manifesto; time is overdue as tax targets need to be met to a) bring down the current high level of fiscal deficit, and b) to start delivering on higher development spending, especially with regard to welfare spending.
Exports need to rise; and that too at a fast pace. The government seems to be learning from China and Malaysia particularly, and efforts should be made soon with regard to overall export promotion policies. In addition, government should task Planning and Development Ministry, Economic Affairs Division, and other related line ministries/departments to deliberate on ways with the bilateral and multilateral development partners, with regard to targeting foreign aid more in enhancing exports.
Exports need to rise; and that too at a fast pace. The government seems to be learning from China and Malaysia particularly, and efforts should be made soon with regard to overall export promotion policies
Equally importantly, the government will need to formulate a policy to assist export businesses in producing more exportable output that is compliant with World Trade Organisations’ (WTO) protocols. For that, the government will have to upgrade the technical capacity of the WTO section in the overall Ministry of Trade, which should include overall better policy and technical experts- including lawyers- that can assist in supporting businesses in preparing better in the overall WTO regime, and in enabling them gain greater space in international markets for the goods and services they produce.
Here, textile sector- the main exporting industry of the country- needs to be focussed and properly assisted in terms of a) providing cost effective, fluent energy supply, b) tax cuts where possible, c) enhanced subsidized loan opportunities for investment purposes, d) modernizing the spinning industry through shifting to higher value-adding processes, and greater count yearns, e) increasing capacity/skills of labour in the weaving and knitting industry, including achieving required level of computer literacy among labour to better manage and monitor processes involved, f) improving labour productivity and skills level in the dyeing and finishing industry, g) enhancing the productivity of apparel industry, and h) widely making available pest resistant cotton seeds. Such micro-level based approach, in terms of solutions, need to extended to other industry, if currently not in the policy papers of PTI as a backup document to the Manifesto; where rightly so the overall vision is only highlighted.
On the other hand, import bill luckily is expected to fall at the back of falling oil prices globally. For the yawning current account deficit to lessen though, both improving exports and rationalising imports should be the main focus of government.
To enhance domestic and foreign investment- direct and portfolio- the government should formulate creative policies in enabling financial markets and financial institutions to offer more loanable funds, incentives, and products to investors. The equities markets need to be deepened, since many sectors of the economy are under-listed in terms of companies. At the same time, there should be made a special section within the Pakistan Bureau of Statistics (PBS), which should provide information on all avenues made available by the financial institutions and markets for investors.
Getting prices rights should be up there in the vision of PTI led government, many that be in the real sector, financial sector of the economy, or the wholesale markets. In fact, the PM in his 100 days performance speech rightly pointed that agriculture wholesale markets need to be reformed so that the prevailing situation whereby inordinate income is amassed by the middle man or ‘aardhti, could be corrected.
Prices of products, labour wages, interest rates all need correction; they all seem to be favouring the oligarchs and plutocrats, while the ordinary economic agents suffer. For instance, the government should b) fix apparently artificially hiked up prices in the real estate market, b) rationalise the interest rates on loanable funds and deposits, which overall means analysing and rationalise the banking spread, c) lower, and if possible, eliminate instability in the foreign currency prices caused by speculative practices by economic agents that are currently working in an environment of weak surveillance and regulation, d) remove oligopolistic price controls in the wholesale markets, for which the government will need to revitalise the Competition Commission of Pakistan, among other areas of the economy.
Monetary policy alone will not reduce inflation, especially in a developing country context like Pakistan, where fiscal aspects of price setting, including as indicated above, need to be fixed. Overall, an innovative way to improve the functioning of markets, where there is a situation of artificially hiked up prices, could be to introduce some kind of hierarchy — of either government or private sector representation, or both- in the market, so that forces of demand and supply could interact in the freedom of an uninfluenced environment.
Last but not the least, all those sections of the population that are critical of the PM’s microeconomic policies — like removing foot and mouth disease in the livestock sector to improve prospects with regard to meat production and exports, or for that matter providing eggs and chicken to poor agriculture families — need to understand that any successful economic policy, let alone a poverty alleviation one, is only successful if the macroeconomic policy milieu has strong microeconomic foundations. So while the government tries to fix the macroeconomic issues, it is right in focusing in parallel on the microeconomic grounds on which they stand. For example, while the textile sector requires accommodative monetary and fiscal policies, including provision of energy supply, it requires that the ‘ustaads’ or master workers in each of its main industries like spinning, weaving and knitting for example, are well trained to the extent of having knowledge of modern computer systems involved in raising the quality of textiles.
