EDITORIAL: The new minister for finance and revenue, Miftah Ismail, tweeted “we cannot let our fiscal and external financing position deteriorate further and have our development partners walk out. Tough choices need to be made.” The dire state of Pakistan’s economy today is patently evident as noted repeatedly by Business Recorder and substantiated in the report released by the World Bank this Tuesday, which noted, among other things, that the consolidated fiscal deficit in the first quarter of 2022 showed an increase of 20.6 percent year on year.
Higher taxes on imported items and sales tax on goods led to an 18 percent growth in revenues but this was outweighed by higher government spending which grew by 18.7 percent. With most of the increase in spending coming from non-interest expenditures, the primary surplus (minus debt servicing as and when due) shrank to 81 billion rupees. And a sharp increase in federal current expenditure led to a 33 percent increase in federal fiscal deficit — leading to the wider consolidated fiscal deficit.
The World Bank report, however, emphasised in consonance with views expressed in International Monetary Fund’s (IMF’s) ongoing Extended Fund Facility (EFF) programme and in subsequent quarterly review documents, that Pakistan’s vulnerability to debt-related shocks will remain elevated as will the country’s external financing requirements, and to meet these, Pakistan will need the continued support of bilateral and multilateral partners and access to international capital markets.
This has been accepted by the new economic team leader Miftah in the tweet noted above. One may assume that the present government is actively engaged in talks with Arab development partners, particularly Saudi Arabia, Qatar and the United Arab Emirates with a focus ideally on grant assistance (it may be recalled that Pakistan received a 1.5 billion dollar grant from Saudi Arabia during the previous PML-N tenure) and at worst parking dollars in the State Bank of Pakistan (SBP) to shore up the rupee value at terms that are considerably more favourable than the one billion dollar currently parked with the SBP for one calendar year.
It is also hoped that the US by dint of being a major shareholder in the IMF, will lend support in convincing the staff to phase out the EFF programme to beyond the scheduled deadline of September 2022 accompanied by a phasing out of the harsh conditions that are even more politically challenging for the incumbent government with intent to hold elections later this year (and not to delay them beyond the first quarter of next year) than they were for the PTI administration.
That the reforms specified in the EFF need to be implemented is not in question; but our development partners need to carefully consider the fact that these reforms, envisaging a considerable increase in electricity tariffs and petroleum prices, over and above the amount required even if the relief package announced by the former Prime Minister is withdrawn that was the primary reason for the delay in the successful completion of the seventh review to date — would be tantamount to political hara-kiri for the coalition government in the forthcoming elections.
There is therefore a need for the Fund to accommodate a strategy for an increase in phases and complete the seventh review promptly. And, as also noted by the World Bank, that with low fiscal and external buffers it is important for Pakistan to successfully complete the ongoing IMF-EFF programme and therefore it is critical for the Fund to take account of the fact that Pakistan is a democracy, currently being administered by a ten plus parties’ coalition government looking towards elections.
The World Bank report also notes that Pakistan’s real effective exchange rate (REER) depreciated by 3 percent between July-February 2022. However, as per the SBP, the July 2021 REER was 99.5682 with the February REER given as 97.9097 (provisional) which is a depreciation of 1.66 percent. This was in marked contrast to the comparable period for last fiscal year (July-February 2020-21) when REER appreciated by 4.4 percent and for the entire fiscal year 2020-21 the rupee appreciated by 7.17 percent — a year which witnessed growth of around 5.6 percent (after rebasing) sourced to high domestic demand met largely from inventories that had piled up due to the pandemic rather than increase in output, and a very low base of negative 1.4 percent in 2019-20.
There is little doubt that there was considerable pressure on the SBP and the Monetary Policy Committee until not too distant a past to strengthen the rupee while in recent months the widening trade deficit, repayments and rollovers due to the rupee depreciation.
And finally, the IMF in a report noted that bank holdings of sovereign debt were more than 25 percent in Pakistan and the World Bank report noted that credit remains concentrated in the corporate segment with credit to the private sector low as a percent of GDP, while small and medium enterprises financing is less than one percent of GDP with government the dominant borrower accounting for 66.8 percent of total credit. The Bank’s advice is potent and critical: “to mitigate immediate macroeconomic risks, the government should focus on containing the fiscal deficit at a level which ensures debt sustainability, closely coordinate fiscal and monetary policy and retain exchange rate flexibility.”
Copyright Business Recorder, 2022
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