Anyone understand these economic indicators?

[opportunist86]

Rising PKR-US$ conversion rates, rising energy costs and gas and petrol prices. People say these steps will help in the long run yet seem to be very difficult now. According to BBC similar steps taken on the orders of IMF resulted in the sustainability of Italy's economy. But buying power of ordinary people was badly effected. I want to learn how do they effect and why.

 

[Bilal.]

It's all due to a misplaced priority of the government. They are unwilling to curb illegal leak of foreign exchange, unwilling to put in proper direct taxation, unwilling to curb corruption in SOEs that bleed hundreds of billion. In the end the burden of all this is put on common people by devaluation, indirect taxation and removal of subsidies.

 

[graphican]

Rule is simple, applying taxes on petrol, electricity and amenities are the easiest ones to do and they affect the poor segment of the society several times. From bread to medicine and from cloths to raw material, everything needs one or another form of transportation before they reach its consumers. A price rise of 5 Rupee a litter and considering a litter petrol takes goods across 10KM, cost of wheat, floor, milk, sugar, serials, rice and everything will be increased by 5%-10% and that is direct increase in cost. When round of inflation spins, everybody increases the prices ON TOP of these 5%-10% natural fuel hike and ultimately, everything ends up getting 12% to 15% expensive in a matter of a month.

Now is that a positive indicator? What is your understanding of meaning of life? If you take that the food you eat, the water you drink and the health, education, security and surviveability of YOU as a PERSON is important then everything will be affected negatively and you live a harder, irritating and pinched life. But if your meaning of life is that Nawaz Shareef or Asif Zardari or Imran Khan are alive and you just and everybody in the country is just a ****ing Voter then sure, such indicators indicate improvement the life of Nawaz Shareef, Zardari or Imran Khan.

 

[ziaulislam]

govt had two options
1. it curb lossess of govt insitutes, put down line losses in electric sector to standard 10% and start direct taxation.
2. hit the middle class with indirect taxes and let rich be happy. over charge people already paying bills

well it selected the option no.2

 

[ajpirzada]

what BBC says may or may not be true. it simply stated what the author thought it to be. furthermore, in all fairness it is too early to conclude if EU is out of the mess they were in.
anyways, coming to the relevant point. all these policies which you have stated result in a distribution of wealth to haves from have nots. IMF simply doesnt care about distributional effects of their policies and majority of the macroeconomic models do not have mechanism to consider distributional effects in their frameworks. to be honest, similar is the case with any monetary policy. Central Banks around the word do not care about the distributional effects despite their significance. The argument for this is, that the distributional effect no not matter at the aggregate level because it simply means that one group of people now possess less of wealth while another group possesses more of it in equivalent amount. It is a very dangerous presumption for the long run at least.

so when people cry out that IMF policies are making them poor while at the same time all the rich in the country are happy, it is because of what i have said above. In the short run these policies are detrimental to growth without any dispute. ADB, IMF and WB have simultaneously decreased their GDP growth forecast for the next year following this deal. However, IMF - while decreasing the short term forecast - says that GDP will increase in the medium to long run. But then J. M. Keynes said, 'in the long run we are all dead.' because the long run never comes and you never know what other things might happen over time which may change the whole picture. And what if this long run growth once again benefits only the rich? Growth in itself is not the solution and its a very bad indicator to judge how much the common people of that country are benefiting.

finally, there are economic arguments against each of these policies which i have mentioned many times elsewhere and will not repeat here. Personally, i dont believe that these policies will result in long term growth which at the same time may also be equitable.

 

[bandit]

IMF did not put any requirement for PKR to depreciate, I believe Pakistani Finance minister and economists are well aware of this but purposely deny these accusations to save there own skin.

What Pakistanis need to understand is IMF is the only organization willing to help them avoid a BOP crisis, and suggest policy reforms. If Pakistanis were capable of solving there mess on their own, they would never have needed any direction from IMF.

These directions are required by IMF now since the Pakistan is increasingly seen as a black hole where money keeps going without any recourse.

Pakistan can't expect money from IMF just by saying we are broke every six months or so without strings attached. You guys had enough of a free ride, time to tighten your belts now.

 

[Bilal.]

BOP crisis? With our current account deficit at around 2% it's cannot be termed as a crisis. But yes the unwillingness to curb illegal money transfers is just beyond logic. There is easily billions being transferred by illegal means if they can be channelled through banking channels the mere difference of ~4 billion between imports and export + remittences can be surmounted. I guess since all the present day rulers have used these illegal means to transfer money out of Pakistan they are unwilling to take action against such operators.

 

[bandit]

BOP crisis? With our current account deficit at around 2% it's cannot be termed as a crisis. But yes the unwillingness to curb illegal money transfers is just beyond logic. There is easily billions being transferred by illegal means if they can be channelled through banking channels the mere difference of ~4 billion between imports and export + remittences can be surmounted. I guess since all the present day rulers have used these illegal means to transfer money out of Pakistan they are unwilling to take action against such operators.

CAD is 2% year on year and will keep depleting reserves regularly eating into the ~6 billion reserves Pakistan has.

The 6 billion are hardly able to cover 1.5 months pf Pakistan imports. Couple this with the fact that Pakistan has 7.5 billion of gross debt which means Pakistan is living off credit. A little shock here on inflows or oil prices and you will have a BOP crisis before you know it.

I can't comment on your illegal billions theory without substantiation, but billions of $ being movd would raise some alarms, I doubt it actually happens on that scale.

Fun Facts: Pakistan has 6 billion reserves of now, 2 billion came as freebie from your best paying ally: USA.
China has a currency swap agreement with China for about 900 million, Chinese charge the market rate for it, and combine this with the USA grant, make about half of Pakitsan FX reserves.

 

[Bilal.]

Illegal money transfer is not a theory, hundi/hawala is a known fact and state bank governor is on record highlighting the issue but again there is a lack of concrete action.

 

[bandit]

Illegal money transfer is not a theory, hundi/hawala is a known fact and state bank governor is on record highlighting the issue but again there is a lack of concrete action.

Did the state bank governor give the figure of billions?

Also, isn't hundi hawala incoming money, that would actually benefit Pakistani Forex position and economy.

 

[Bilal.]

Yes there have been various estimates in the past all putting it in billions, one good example is post 9/11 when there was a serious drive against it due to US pressure for a couple of years, the remittances jumped from less than a billion to around 4-5 billion.

As for it being beneficial, the answer is no. There is is no actual inflow of money, the way it works is an agent takes the money in a foreign country and keeps it there, he contacts his guys in Pakistan who disburse the amount in local currency, hence, no actual transaction/remission takes place.