Economic indicators in July 2022

The first month of 2022-23 which has just come to an end presents a mixed picture. Perhaps the most positive development is the big containment in the trade deficit during the month. Imports have fallen by as much as 38 percent with respect to the level in June 2022 and by 13 percent compared to the level in July 2021.

Overall, the deficit in the balance of trade has contracted by almost $2.4 billion. However, these are PBS (Pakistan Bureau of Statistics) numbers on clearance of consignments and it is not clear if the SBP (State Bank of Pakistan) numbers on import payments will reflect a similar big decline.

But there are two concerns with the trade numbers. First, exports have also fallen sharply by 24 percent in relation to the level in the previous month. This highlights that the looming global recession will imply that there could be a continuing contraction of exports in 2022-23. This will put pressure for sustained efforts at contraction of imports, through strong monetary policy and other measures.

Second, despite the large decline in the goods trade deficit the foreign exchange reserves of the SBP have shown a big fall of $1431 million in July.

Does this imply that there has been a worsening in the balance of other transactions in the current account? However, it is more likely that the balance in the financial account has been significantly smaller because of less inflows of loans in the absence of a functional IMF (International Monetary Fund) programme.

Reserves are down to $8885 million at the end of July. This is not even adequate for providing one and a half months import cover. Along with the lack of political stability, the value of the rupee has plunged by 14.2 percent in July. This does not auger well for the inflation rate in coming months.

The major area of concern is the exponential path being followed by the rate of inflation. It has accelerated on a year-to-year basis from 13.8 percent in May, to 21.3 percent in June and to 24.9 percent in July.

This is one of the highest ever rates of inflation. The impact on the lower income groups is even larger, with a higher rate of inflation in food prices of almost 29 percent. The big jump in administered prices of petroleum products, electricity tariffs including the fuel adjustment charge, and gas price have contributed almost 41 percent to the inflation in July 2022.

The higher rate of inflation continues to put pressure on interest rates in the secondary market. The last MTB auction on the 27th of July saw the 3-month rate rise to 16.63 percent, an increase of 155 basis points in relation to the auction on the 29th of June.

This will put pressure on the Monetary Policy Committee of the SBP for a further enhancement in the policy rate beyond 15 percent.

Already, high interest rates have led to private investors taking a back seat and credit to the private sector has fallen by 12 percent in July. Declining imports of machinery are likely to be significant in limiting the level of imports in the economy in 2022-23.

There are other indicators also of negative developments in the real economy. Power load-shedding continues due to shortages of imported fuel, especially RLNG. The textile sector is seeing a significant decline in output level, especially for exports.

The extremely harsh floods, especially in Balochistan and in parts of Punjab, are bound to adversely impact on food supplies, in particular vegetables and fruits. Already, the prices of fresh vegetables are up by 40 percent and of fresh fruits by 39 percent, respectively.

The resulting labour market situation, especially with a big contraction in construction activity, has clearly worsened. According to the PBS, the year-to-year increase in July of wages of construction workers is 12 percent, as compared to the rise in cost of living of over 25 percent. This implies that there has been a decline in the standard of living of these workers of as much as 13 percent in only one year.

We turn now to a crucial area, that is, the state of public finances. The first key indicator is the growth in tax revenues of FBR. The provisional estimates for July reveal a growth rate of only 10 percent. The annual target growth rate is 22.5 percent. FBR claims that the target for July has been achieved but this is the consequence of an artificially low target for the month.

Import-based revenues have shown near zero growth. This includes the customs duty, sales tax on imports and withholding income tax on imports. The growth rate in the import tax base of the rupee value of imports is as high as 20 percent in July on a year-to-year basis. Why then have import-based taxes performed so poorly?

The answer probably lies in changes in composition of imports. Imports of POL products and transport equipment contribute almost 30 percent to import based tax revenues. Both these imports have fallen in July.

Domestic tax revenues have performed better, especially with over 30 percent growth in income tax revenues. However, domestic sales tax revenues have fallen by 13 percent, probably because of the withdrawal of the sales tax on POL products. The progressive taxation measures taken in the 2022-23 budget have bolstered income tax revenues.

The annual revenue target for FBR in 2022-23 is Rs 7,470 billion. This requires additional revenue generation during the year of almost 1,370 billion. The target is very ambitious and the expansion in the tax bases due to high inflation will be countered by a low GDP growth rate and a limited growth in the import tax base.

The other area of concern is the attainment of the big target of Rs 855 billion in revenues from the petroleum levy in 2022-23. The consumption of petroleum products is declining due to the high prices and this limits the scope for higher revenues from the levy.

There are also some developments on the expenditure side which could put pressure on the budget deficit. First, the relief work on floods will add to expenditure of provincial governments and put pressure on the size of the cash surplus.

Second, the notorious power sector may require a larger subsidy to sustain its activities. Increasingly, the focus of the IMF programme in 2022-23 may be on the performance criteria related to revenues and the size of the primary deficit. This will put pressure for mini-budgets.

Fortunately, the month of August has commenced with a spate of good news. The rupee has appreciated strongly by over 6.2 percent in one week. Also, the gap in meeting the annual external financing requirements of 2022-23 is likely to be filled and the IMF program should become operational once again before the end of August. The hard and sustained efforts by our Finance team in Islamabad must be fully appreciated.

Copyright Business Recorder, 2022