Contrasting trends

The economy is showing contrasting trends in different segments of activity. This is due to various factors like the severe stagflation, looming uncertainty, varying degree of success of policies and so on. These contrasting trends are visible in the external balance of payments, the expansion in money supply, public finances, rate of inflation, international trade, etc.

The first very unusual trend is observed in the balance of payments. Despite a quantum reduction from July to March 2022-23 in the current account deficit of $9.6 billion as compared to the deficit in the corresponding period of last year, the overall balance of payments has remained in deficit of $5 billion, the same as last year.

The 74 percent decline in the current account deficit has been neutralized by a big decline in net inflows into the financial account. In the first three quarters of 2021-22, there was a very large surplus of $8.4 billion in this account, which has turned negative and there has been a net outflow of $2 billion.

The net inflow into the government account has been transformed from a positive $5 billion to a negative $2.1 billion. Disbursements are down by 36 percent while the amortization of external debt has increased by 37 percent. Consequently, with very different trends in different components of the balance of payments in 2021-22 and 2022-23 the outcome has been the same of a decline in foreign exchange reserves of $5 billion.

Turning to the rate of expansion in money supply in 2022-23 up to the 7th April, it has been somewhat faster at 4.5 percent compared to 3.1 percent in the same period of last year.

However, the source of expansion has been very different. Credit to the private sector has actually declined by as much as 84 percent. But this has been more than compensated for by over-tripling of the government borrowing from commercial banks. The colossal jump in domestic borrowing is a reflection not only of a larger deficit but of total lack of access to external financing.

There are a number of major contrasting trends in the public finances that are visible in the first half of 2022-23. The first is the huge divergence between the rate of change in the federal current and development expenditure, respectively.

The former has increased by as much as 32 percent. This has ‘crowded out’ development spending, which has consequently been reduced by 32 percent. The overall impact is still a big increase in total federal spending of 28 percent and a resulting failure in remaining within the limits of the budget deficit target.

There is also a sharply contrasting trend in the growth of FBR (Federal Board of Revenue) revenues. A very positive development is the extremely high rate of increase in income tax revenues of almost 50 percent in the first six months. This is perhaps the highest increase ever. But it has been neutralized by a near zero growth in indirect tax revenues, due to contraction especially of the import tax base.

Consequently, the overall growth rate in FBR revenues in the first half of 2022-23 is 17 percent, which is significantly below the targeted growth of 22 percent. However, the good news is that the tax system has become significantly more progressive.

There are also sharply contrasting trends in the rate of inflation. The most worrying development is the exceptionally large increase in food prices from March 2022 to March 2023 of 49 percent. This again probably represents the fast increase ever in food prices. In contrast, non-food prices have shown a significantly lower rate of increase in March 2023 of 26.7 percent.

Research on the determinants of the incidence of poverty show that it is very sensitive to the difference between the rate of increase in food prices and in the overall CPI. As of March 2023, it is 13.6 percentage points. This is likely to have led to an increase in the incidence of poverty by 27.2 percentage points. In effect, over 20 million people are likely to have already fallen below the poverty line in 2022-23.

There are other contrasting trends in the currently observed high rate of inflation. It is remarkable that the prices of various services have shown very moderate rates of inflation and limited thereby the overall rate of inflation, which is still very high.

The most striking example is of housing rent. According to the PBS (Pakistan Bureau of Statistics) it has on average risen by only 5.4 percent. This service has the highest weight in the CPI of over 19 percent. Therefore, the extremely low rate of increase in rents has reduced the rate of inflation by 5.7 percentage points. Other services which have shown less inflation are health, communication and education of 17.9 percent, 8.5 percent and 4.8 percent, respectively.

There is also a significant divergence in the growth rate of nominal wages and the rate of inflation. The wages of construction workers have increased by 18.9 percent, as compared to the overall rate of inflation of 35.4 percent. Therefore, in only nine months real wages of these workers have fallen by as much as 16.5 percent. Similarly, wages of household and personal grooming service providers have fallen by 17 percent and 4 percent, respectively. Clearly, the fall in real wages substantiates further the finding that poverty has risen sharply already during 2022-23.

Finally, there is a contrasting trend in the relationship of Pakistan with some of its major trading partners. This includes the bilateral free trade pact between China and Pakistan and the special relationship that Pakistan has with European Union countries due to the access to GSP plus to Pakistan.

During the first nine months of 2022-23, as in previous years, Pakistan has a very imbalanced trading relationship with China with a trade deficit of $6.2 billion, equivalent to over 30 percent of the total deficit. Pakistan has exported only $1.5 billion to China, but imported five times as much at $7.7 billion. Perhaps the time has come to review the trade agreement with China.

The contrast with respect to the EU is very sharp. Pakistan actually enjoys a trade surplus with respect to the 27 countries of the EU. From July to March, the exports have been $5.7 billion to these countries, equivalent to 27 percent of total exports. Imports have been significantly lower at $3.0 billion, implying a trade surplus of $2.7 billion.

The above sets of contrasting trends are somewhat unusual in nature. Fortunately, some of these trends are positive, while others are negative in nature and will need to be reversed.

Copyright Business Recorder, 2023