EDITORIAL: The federal ministry of finance has uploaded the Monthly Economic Update for July on its website which understates the “short-term headwinds” (read a year-on-year inflation of over 20 percent, a decline in international reserves to 8.5 billion dollars contributing to significant upward pressure on domestic interest rates as well as significant fiscal consolidation in the making), while optimistically maintaining that “long- term policies should see through these short-term headwinds.”
And the way out: “once the tranche from the International Monetary Fund (IMF) is received, additional financing channels will open themselves. This should allow focusing on longer term objectives. One of them is to secure a high sustainable growth trajectory capable of absorbing Pakistan’s rapidly growing human capital while avoiding internal and external financing constraints.” Disturbingly, these claims are easily challengeable on three counts.
First, the Fund is insisting on contraction of the economy through appropriate monetary and fiscal policies that would constrain growth of gross domestic product (GDP), projected at an unrealistic 5 percent in the budget documents that multilaterals have already downgraded by one percent to 4 percent on their website. Independent economists, however, are projecting a further downward revision during the course of the year which, in turn, would have implications on tax revenue (with around 60 percent of the envisaged budgeted increase attributed to the GDP rate of 5 percent). There is therefore the distinct possibility of higher taxes that would further erode the disposable income of households constraining demand of essentials — food, clothing, school fees, etc., which are likely to have serious socio-economic implications.
Second, Pakistan’s rapidly increasing human capital does indicate a high percentage of youth in the total population relative to other countries which makes it incumbent on the provincial governments to allocate appropriate amounts on education (a provincial subject except Higher Education Commission) — an allocation lacking in the federal and provincial budgets given their financial constraints that, in the parlance of the Update, consist of a ‘headwind’ that has been prevalent for decades.
In addition, the youth require adequate job opportunities which may present a challenge if the large scale manufacturing (LSM) sector, heavily reliant on borrowing from banks, finds the 15 percent discount rate too high.
The Update though does note that to avoid internal and external financing constraints, effective supply side dynamics must be combined with prudent demand management; and while the market indicates that demand management can be taken to mean pass-on to the consumers of (i) a rise in international commodity prices (due to the Russia-Ukraine war) coupled with (ii) the daily erosion of the rupee-dollar parity that continues unabated, yet supply management is perhaps a reference to making essential items available in utility stores at subsidised rates with many consumers already complaining of lack of availability of the items on the shelves of these stores.
And finally, in spite of almost daily claims by the two economic team leaders — the finance minister and acting governor State Bank of Pakistan — that the rupee erosion is “unwarranted” and will be arrested and reversed once the Fund releases its 1.177 billion dollars tranche accompanied by the release of pledges by friendly countries that are linked to the tranche release, their assertions have not had any impact to allay the extremely unfavourable market perceptions that persist.
While some reckon that the blame must be shared with the ongoing political uncertainty and polarisation not only within the general public but also within institutions yet while one can urge the parties to engage in constructive dialogue for national interest yet one cannot but urge the economic managers, specifically appointed to undertake corrective measures to resolve the underlying problems that are fuelling the erosion of the quality of life, to revisit their recent policy decisions.
One can only emphasise that out-of-the-box thinking is necessary at this juncture of our history, an out-of-the-box thinking that is not evident in the Fund’s policy conditions and their tacit acceptance by the economic team leaders.
The Update notes 229.88 rupee-dollar parity on 25 July which two days later on 28 July registered 240 interbank, exports of 32.5 billion dollars last year were far outpaced by imports of 72 billion dollars raising the current account deficit from 2.8 billion dollars in 2020-21 to 17.4 billion dollars in 2021-22, and an impressive FBR revenue rise of 29.1 percent last fiscal year was nonetheless merely 8.96 percent of GDP last year as per the budget documents, an appallingly low amount. And LSM in 2020-21 (July-May) was 10.2 percent rising to 11.7 percent in the comparable period of last year and this on the back of expansionary policies which are already reversed to conform to the Fund conditions.
One can only hope that the incumbent government takes advantage of the 6.1 percent growth in remittances last year, slashes its own expenditure by demanding a sacrifice from all the recipients of current expenditure, and engages with those able to think out-of-the-box.
Copyright Business Recorder, 2022
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