REMOVE SUPPLY SIDE CONSTRAINTS TO CONTAIN INFLATION
INTERVIEW ANJUM NISAR, MD ANJUM ASIF (PVT.) LTD., FORMER PRESIDENT KCCI
June 18 - 24, 2012
To ignite a spark in the depressed economy calls for radical steps for removal of supply side constraints, which is a proven tool for containing inflationary pressures even in the developed economies of the world.
This was stated by Anjum Nisar, a prominent business leader and former president of Karachi chamber of commerce and industry (KCCI) in an interview with Pakistan & Gulf Economist (Page).
Anjum firmly believes tightening the monetary policy to contain inflation is not a result oriented option because it not supported well by the fiscal policies of the government, instead the unlimited government borrowing from commercial banks as well as the state bank of Pakistan (SBP) happens to be counterproductive. While huge government borrowing is contributing to the inflationary pressures, banking system finds a safe haven for investment in it, becoming complacent to finance private sector that somehow carries a risk as compared to the secured investments in government papers.
In fact, high rate of interest has adversely affected economic activity, consequently affecting the gross domestic product (GDP) growth rate, which was stated to be over three per cent during the outgoing financial year 2012.
Though tight monetary policy could be a right step to control inflationary pressures if duly supported by the fiscal policies. Relying on interest rate alone obviously cannot produce the desired results, Anjum remarked.
He said that there are some other tools as well which are in vogue in many economies, which are also confronted with the inflationary pressures. They did not crowd out private sector by increasing interest rate rather they preferred to keep the policy rate at the lowest level to help small and medium enterprises and large scale manufacturing to carry out their business and produce more and more revenue to offset the effects of inflation.
Anjum was of the view that instead of relying on banking sources for bridging budgetary deficit, serious and earnest efforts are needed to expand small tax base.
Just look at our tax to GDP ratio which hardly comes to 8.5-9 per cent to GDP while even the smallest economies contribute more tax to GDP, he said adding Ethiopia is the only country which you can compare to Pakistan in this regard. Otherwise, even poor economies in the region have good tax to GDP ratio.
He quoted some figures of tax to GDP ratios of various countries to make his point clear. Zimbabwe's tax to GDP ratio is 22 per cent while in neighbouring India, it is somewhere 14 to 15 per cent. It is ridiculous that despite generating enormous income, agriculture sector enjoys tax exemptions under various covers, he commented. A level playing field is need of the hour to evolve a sense of partnership among all the stakeholders of the economy. Instead of looking for bank borrowing and other sources, the policymakers should look at all income generating sources including agriculture sector to get rid of financial deficit once for all.
As a result of relying on borrowing, Pakistan today has become heavily indebted economy. Total debts reached alarmingly to Rs12 trillion including foreign debt of five trillion rupees, or $58.2 billion. In new financial 2012-13, the economy will be burdened with debt servicing of over Rs925 billion, which includes Rs80 billion to foreign debt servicing and Rs845 billion to domestic loans. The breakup of debt servicing alone indicates that Rs315 billion is required per day for interest payment alone.
Anjum exhorted the policymakers that they should go for growth based policies and convince the government to restrain from bank borrowing to finance its deficits because that is the only way out to bring down the interest rate in the country.
The inactivity in the private sector investment carries serious consequences in the form of poor per capita income, which is restricted even below Rs313 in view of two per cent population growth, which is adding to poverty level in Pakistan. Quoting the World Bank's finding, he said, 62 per cent of the population is surviving with an income of less than $2 per day. As a result of restricted access of private sector to credit primarily due to high rate of interest and energy crisis, Pakistan has lost at least three billion dollar worth of exports.
During the last four years, the government has paid Rs1100 billion subsidies to the power sector, which comes to Rs275 billion per year and Rs75 crore per day, which is of course an unbearable burden on the economy struggling for survival. At the moment, Pakistan is short of at least 5000mw of power, yet surprisingly no allocation was announced in the budget to meet this shortfall.
Plenty of alternative energy resources are available in the country. The plans to develop Thar coal will start to add to generating capacity not before 2016. As a result of power shortage, a large number of textile units have gone out of operation in the country especially in Punjab. The industrialists finding no option are eyeing for relocation of their investments, which is a bad sign for the economy because it may lead to flight of capital from the country. Hence, in order to address power crisis, there is a need to work on war-footings for shifting the current oil fired system to coal based power generation, which can save hard earned foreign exchange being wasted on import of costly oil, Anjum advised.
The energy crisis persisting for quite sometimes has badly affected the pace of foreign investments. He recalled in 2006-07 foreign investment was estimated at $6 billion, while it fell to $721 million in the first 11 months of the current fiscal year, which speaks volume of horrible energy crisis fallouts, Anjum observed.