A macroeconomic brief released by the Pakistan Institute of Development Economics (PIDE) calls for urgent, decisive and bold steps to pull the economy out of stagflation. The economic recovery witnessed in 2010-11 suffered an unexpected setback at the hands of unprecedented floods in August 2010 that caused widespread devastation in the economy. The floods not only caused a slowdown in agricultural growth, the manufacturing sector, already battered by energy shortages, also took a hit as a result of supply disruptions and damage to physical infrastructure including power plants, gas fields, and power grids. On an annual basis, the manufacturing sector contracted by 2.3 percent during July-November 2011. On the other hand, inflation remains stubbornly high due mainly to excessive monetization of fiscal deficit, entrenched inflationary expectations, and supply disruptions.
The brief argues that as major source of stagflation are the supply shocks, part of the solution lies in boosting supply by removing supply side bottlenecks including energy shortages. Also, stopping monetization of fiscal deficit would help curb inflationary pressures in the economy. To achieve high and sustained growth over the long run, a host of institutional reforms aimed at redefining the role of the state in the economy from an active player to an enabler, fostering competition, plugging leakages and curbing rent seeking are required.
The brief maintains that policies to address supply side constraints and boost economic growth do not have to wait until full restoration of macroeconomic stability and can be initiated in tandem with macroeconomic stabilization policies. For instance, though fully addressing the energy crisis would take some time, some immediate steps can help in mitigating the energy shortages. Experts believe that if the issue of circular debt is resolved together with upgradation of existing power plants, up to 1500-2000 mw of electricity can be immediately brought into the power system which could help boost supply in the short run. In a medium term perspective, and once macroeconomic stability gains traction, both monetary and fiscal policies can be attuned to prop up the economy and revive economic growth on a sustained basis.
While concurring with the view that the current monetary policy stance has failed to curb inflation on the one hand and has stymied economic growth on the other, the brief cautions that easing of monetary policy stance at this time would unleash demand pressures in the economy thus stoking inflation. For this reason alone, there is a need to maintain the current monetary policy stance. This should, however, be accompanied by a better coordination between monetary and fiscal policies so that both policies work in lock step to control inflation.
Difficult decisions shall have to be taken to restore fiscal discipline. In particular, public spending needs to be rationalized through phasing out of all but targeted subsidies, restructuring of the state-owned enterprises, reduction in current expenditure, and reprioritizing the public sector development program. With the tax to GDP ratio at the abysmal level of 9 percent, the need to generate more revenues also has a sense of urgency. Past efforts to enhance tax revenues have been hampered by the lack of documentation in economy. The imposition of RGST would not only generate more revenues but also help the process of documentation. Much against the popular perception, the expert opinion suggests that RGST would be inflation neutral. The brief argues that not only the RGST should be imposed but other potential sources of tax revenues including agriculture, services, and real estate be brought urgently under the tax net.
The brief stresses that there is a need to think beyond stabilization and put in place reforms to free up private enterprise and enhance productivity for sustained economic growth which is essential for job creation and poverty reduction.
The brief argues that as major source of stagflation are the supply shocks, part of the solution lies in boosting supply by removing supply side bottlenecks including energy shortages. Also, stopping monetization of fiscal deficit would help curb inflationary pressures in the economy. To achieve high and sustained growth over the long run, a host of institutional reforms aimed at redefining the role of the state in the economy from an active player to an enabler, fostering competition, plugging leakages and curbing rent seeking are required.
The brief maintains that policies to address supply side constraints and boost economic growth do not have to wait until full restoration of macroeconomic stability and can be initiated in tandem with macroeconomic stabilization policies. For instance, though fully addressing the energy crisis would take some time, some immediate steps can help in mitigating the energy shortages. Experts believe that if the issue of circular debt is resolved together with upgradation of existing power plants, up to 1500-2000 mw of electricity can be immediately brought into the power system which could help boost supply in the short run. In a medium term perspective, and once macroeconomic stability gains traction, both monetary and fiscal policies can be attuned to prop up the economy and revive economic growth on a sustained basis.
While concurring with the view that the current monetary policy stance has failed to curb inflation on the one hand and has stymied economic growth on the other, the brief cautions that easing of monetary policy stance at this time would unleash demand pressures in the economy thus stoking inflation. For this reason alone, there is a need to maintain the current monetary policy stance. This should, however, be accompanied by a better coordination between monetary and fiscal policies so that both policies work in lock step to control inflation.
Difficult decisions shall have to be taken to restore fiscal discipline. In particular, public spending needs to be rationalized through phasing out of all but targeted subsidies, restructuring of the state-owned enterprises, reduction in current expenditure, and reprioritizing the public sector development program. With the tax to GDP ratio at the abysmal level of 9 percent, the need to generate more revenues also has a sense of urgency. Past efforts to enhance tax revenues have been hampered by the lack of documentation in economy. The imposition of RGST would not only generate more revenues but also help the process of documentation. Much against the popular perception, the expert opinion suggests that RGST would be inflation neutral. The brief argues that not only the RGST should be imposed but other potential sources of tax revenues including agriculture, services, and real estate be brought urgently under the tax net.
The brief stresses that there is a need to think beyond stabilization and put in place reforms to free up private enterprise and enhance productivity for sustained economic growth which is essential for job creation and poverty reduction.
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