On 3 November 2020 Prime Minister Imran Khan announced the industrial support package while the Advisor to the Prime Minister on Finance, Dr Hafeez Sheikh - one of six flanking the Prime Minister - claimed what is by now his signature stance: economic policies have begun to bear fruit, the economy is embarked on the right path and all negative indicators are due to previous administrations flawed policies and/or the profiteers/smugglers/cartels - a stance as inexplicable to independent economists as to the general public.
Sadly, the Prime Minister continues to buy into this narrative which leaves him open to ridicule for, at best, being misinformed or, at worst, being ill-informed (or not being able to separate the wheat from the chaff half way into his five-year term). The latest faux pas by the Prime Minister was his claim that his government has not borrowed in the current year. Data recently released by the Finance Division titled 'Summary of Consolidated Federal and Provincial Budgetary Operations 2020-21 (BO)' reveals that (i) reliance on domestic borrowing rose from 119.5 billion rupees in July-September 2019-20 to 322.9 billion rupees in the comparable period of 2020-21 (a highly inflationary policy); and (ii) net external financing (inflows and outflows) were 166.4 billion rupees in last year's first quarter while in the comparable period of the current year the amount was 161 billion rupees - and the 4.5 billion rupee reduction is too little to take account of the deferment of markup and principal repayment from official sources allowed by the creditor nations to assist the developing countries deal with Covid-19 crisis (especially given that the total amount budgeted under this head was 1.2 trillion rupees in the revised estimates of last year and zero this year).
Today there is visible rising public angst against the government's economic policies given: (i) a persistently high rate of food inflation (over 14 percent); (ii) a contracting economy that has yet to increase employment opportunities compromised last year due to harsh contractionary monetary and fiscal policies agreed by the PTI government with the International Monetary Fund (IMF). Growth forecast by the government is a dismal 2 percent for this year (against the projected 1.5 percent last year downgraded to negative 0.4 percent due to Covid-19) however even this low projection is not supported by multilaterals' forecast of around one percent; (iii) recent large scale manufacturing index (LSMI) data shows an improvement July-September 2020-21 against the comparable period of the year before in textiles (major export items) - from 0.16 percent to 2.08 percent, food/beverages/tobacco - from negative 8.9 percent to positive 12.9 percent, and pharmaceuticals - negative 11.8 percent to 13.24 percent no doubt due to the government's decision to raise prices by over a 100 percent. The LSMI data is also disappointing on two other counts. First and foremost, there is no data corroborating the claim of the Prime Minister and his federal ministers that the construction sector has begun to spearhead growth as a consequence of the construction specific incentive package announced in April this year, including the amnesty scheme. LSMI notes that iron and steel experienced negative 17 percent growth last year and negative 8 percent this year while cement did not feature on the data released by the Pakistan Bureau of Statistics leading one to conclude that it did not experience significant growth. And second, much has been made of a surge in automobile output in recent months however data suggests that it was negative 34.56 percent July-September 2019-20 and negative 5.74 percent in 2020-21 while electronics registered positive 11 percent growth in July-September 2019-20 negative 20.75 percent in the same period of 2020-21 and leather products positive 6.33 percent last year against negative 37 percent this year. And (iv) the government's decision not to raise salaries of civilian and military personnel in the current year would contain expenditure and yet running of civilian government is budgeted to rise by 6.67 percent, pensions by 6.65 percent and defense affairs and services by 5 percent. The raise in the Benazir income Support Programme (BISP) from around 120 billion rupees when the Khan administration's tenure began to the current year's 200 billion rupees - 66 percent raise - is considered inadequate to meet the needs of the over 100,000 who have lost their jobs since the Fund programme began to be implemented in the second week of May 2019.
Notwithstanding the obvious discontent of the public with the handling of the economy, Dr Hafeez Sheikh made six claims on 3 November whose veracity needs to be urgently assessed by the country's Prime Minister.
First, Dr Sheikh claimed that the government has begun collecting taxes from the rich. This claim is not backed by the data contained in the BO 2020-21, released by the division he heads. Direct tax collections (a progressive tax whose incidence is on the rich and not on the poor) accounted for 363.6 billion rupees July-September 2020-21 against 355.6 billion rupees in July-September 2020-21 in the comparable period of the year before. This small increase of 8 billion rupees however can be sourced to the higher collections under withholding tax regime (accounting for over 75 percent of all direct tax collections) which are levied mainly in the sales tax mode, a regressive tax whose incidence is greater on the poor than on the rich. And more disturbingly, in spite of crediting a major component of the sales tax under direct taxes, sales tax collected in the first quarter of 2020-21 was the highest single source of revenue at 435.7 billion rupees against 403.9 billion rupees collected in the comparable period of the year before.
Secondly, Dr Sheikh claimed that government expenditure has been reduced once again citing a reduction in expenditures on Prime Minister's House, Cabinet and the Presidency, components of current expenditure, though he did not mention the exact amount of savings. While one can appreciate the prime minister and the presidency in curtailing their official expenditure yet the following figures contained in the BO disturbingly show a rise in current expenditure from 1.58 trillion rupees in July-September 2019-20 to 1.8 trillion rupees in the comparable period of 2020-21.In contrast development expenditure which spearheads economic activity in this country was disbursed 70.7 billion rupees in July-September 2020-21 marginally less than the 71.7 billion rupees in the comparable period of 2019-20.
Third, Dr Sheikh claimed that civilian and military expenditure have been frozen in the current year. July-September 2019-20 running of civilian government and defense accounted for 87.2 billion rupees and 242.6 billion rupee respectively while the comparable disbursement in July September 2020-21 was 88.9 billion rupees however there was a little over 18 billion rupee decline in defense and services allocation in July-September 2020-21 to 224.4 billion rupees.
Fourth, Dr Sheikh claimed that there was a primary surplus (which does not include markup or repayment of principal as and when due) because of taking difficult decisions however as noted above this achievement is at the cost of a massive rise in the government's indebtedness.
Fifth, Dr Sheikh claimed a significant rise in social safety net budget to 192 billion rupees and a historic package for FATA. While subsequent to the launch of cash disbursements in 2008 to the poor and vulnerable under the Benazir Income Support Programme there has been an annual increase in allocation yet the raise in two years - from 120 to 192 billion rupees has been by far the largest. Critics argue that this rise is not sufficient to take account of the largest numbers unemployed due to Sheikh's policies.
And finally, Dr Sheikh claimed that exports were rising on the back of incentives provided to exporters. True but exports in dollar terms rose by a mere 0.65 percent - to 5474 million dollars in July-September 2020-21 from 5510 million dollars in the comparable period the year before. Exports in rupee terms have risen by nearly 5 percent however one may assume that as exports are meant to strengthen the foreign exchange earning capacity therefore they must be measured in dollars.
The country has without doubt reduced the current account deficit, but the decline has been at the cost of growth, and remittances are rising but multilateral forecasts indicate that this is attributable to the lockdown associated with Covid19 and likely to decline by 2023.
To conclude, the claims made by Dr Sheikh are at best half truths and at worst deliberate lies that are misleading the country's elected representatives.
Copyright Business Recorder, 2020
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