ISLAMABAD: In response to an article, titled “Rate hikes, rupee fall to have serious social impact” published in Express Tribune dated September 16, 2019, it is to be noted that the writer has exaggerated the cost of stabilization under the IMF program while ignoring the anticipated positive impact of the same.
The article suggests that increase in key policy rate is aimed at attracting yield seekers and to attract the so called “hot money”. However the writer ignored to mention the key reasons for increase in policy rate, which includes build-up in excessive demand pressures in recent years and associated increase in inflationary expectations in the economy.
This, together with other administrative measures helped to discourage the imports of non-essential items in order to keep a check on otherwise widening trade deficit. Although the rate hike may induce some “hot money” to get into Pakistan as mentioned, it is not to be used by any means as a strategy for accumulating foreign reserves. This is evident from recent increase in foreign exchange reserves, which has been achieved primarily by reduction in trade deficit.
Furthermore, the article also suggests that both increase in policy rate and PKR depreciation impacted the cost structure of the listed companies through increasing their cost of raw materials.
However, the author didn’t consider the fact that the government has provided a number of incentives to industries. Indeed, in budget FY19-20, the government has provided relief to export-oriented sectors which can now import more than 1600 raw material items at reduced/zero tariff rates.
Additionally, the SBP has kept the lending rates unchanged for export oriented sectors under its Long-term finance facility (LTFF) and Export Finance Scheme (EFS). Over the short-to-medium-term, this would help to reduce chronic woes of the external sector through improving trade balance.
Furthermore, the author claims that the agreement with the IMF may give rise to social crisis and gave the example of Egypt in this regard. On the contrary, IMF, in its recent country report, emphasized the need to increase social safety net spending. For example, a new Division of Poverty Alleviation and Social Safety has been established to design and implement social safety programmes in the country.
Under the head of Social Protection, an amount of Rs 190.6 billion has been allocated in the budget 2019-20 for welfare of the poor segment of the society.The beneficiaries of Ehsaas programme are extreme poor, orphans, widows, the homeless, the differently abled, medically challenged, and the jobless, who will be paid as per establish terms of a National Socio-Economic Registry or data bank based on poverty score card.
Similarly, total subsidies for fiscal year 2019-20 have been estimated at Rs 271billion which increased by 55.4% and 6.5% over budget estimates and revised estimates respectively of 2018-19. Out of which Rs 250 billion has been allocated to WAPDA, PEPCO and KESC. Government has withdrawn hike in gas prices for tandoors. In this regard, government will give Rs 1.5 billion subsidy to Sui Southern Gas Company Limited and Sui Northern Gas Pipeline Limited. Going forward, IMF and government has agreed to reassess the need for any additional social spending to further reduce any impact on marginal segments of the society.
