EDITORIAL: Debt Sustainability Analysis Fiscal Year 2022-23 by Economic Adviser’s Wing and uploaded on the Finance Division website has downgraded the growth rate for the current fiscal year to 0.8 percent from the budgeted 5 percent, consumer price index of 28.5 percent against the budgeted 11.5 percent, and primary fiscal balance of negative 1.2 percent against the budgeted plus 0.2 percent.
The release of these projections on the first day after the Eid holidays soon after federal finance minister Ishaq Dar once again claimed that the government has met all prior International Monetary Fund (IMF) ninth review conditions, including assurances by the friendly countries that their earlier pledges will be met, indicates the obvious: that the inordinate delay in the implementation of the agreed conditions, agreed mid-August last year that led to tranche disbursement on 1 September 2022 and during negotiations from 1 to 9 February 2023, have had a major deteriorating impact on the country’s key macroeconomic indicators that are of concern to the Fund and therefore may require additional measures, particularly those relating to the containment of the overall fiscal deficit as well as the primary deficit.
In the second week of October, after the scale of the damage wrought by floods was known, finance minister Ishaq Dar optimistically projected over 3 percent growth rate for the current year but by January 2023 he began to cite the growth rate in 2018 (6.10 percent), accusing the Khan administration of bringing the growth rate down into the negative realm - a charge that is inexplicable, given that the negative growth rate was during the pandemic year, contained when compared with other countries, and a growth rate of nearly 6 percent achieved in 2022-23.
However, the post-disaster needs assessment report, a product of the government with support from Asian Development Bank, the European Union, United Nations Agencies with technical facilitation by the United Nations Development Programme, and the World Bank released in November 2022 projected significant losses in GDP due to the damage caused by the floods in agriculture, industry and service sector, estimated at 4.8 percent of GDP, with GDP growth of around 2.2 percent.
In addition, the floods were projected to widen the effect on primary and overall fiscal deficits, raise poverty rates to push between 8.4 and 9.1 million people into poverty.
The State Bank of Pakistan in its last (4 April) monetary policy statement noted that “incoming data on economic activity continues to reflect a broad-based slowdown…..combined with the lagged impact of the recent monetary tightening and new fiscal consolidation measures implemented since beginning of March, suggest growth in FY23 will be significantly lower than the post-floods assessment of November 2022.” Or, in other word, the 0.8 percent downgrade by the Economic Advisor’s Wing from the 2.2 percent forecast less than five months ago is a whopping 64 percent lower than what was earlier forecast.
Thus for the report to mention catastrophic floods as a major reason for the growth downgrade is not justified and neither is the non-conducive global environment mentioned as that has been a known factor since the Russia-Ukraine war began more than a year ago.
The other two factors cited notably tight monetary stance and fiscal consolidation purport to lay the blame on extremely harsh IMF conditions; however, these conditions were not implemented till the middle of February 2023 and hence their contribution to the GDP growth rate over the very short term of a month and a half simply inexplicable.
What the government can and should be held accountable for its sustained failure to consider out of the box solutions that would have strengthened its leverage with the Fund, including undertaking structural reforms rather than passing the buck for sectoral inefficiencies to the hapless consumers (raising utility rates and increasing reliance on indirect taxes whose incidence on the poor is greater than on the rich) as well as upping current expenditure of the government rather than reforming the tax structure itself that remains skewed in favour of the elites.
And if one adds Dar’s flawed policy to control the rupee-dollar parity without the reserves to intervene in the market and to extend electricity subsidies of 110 billion rupees to exporters at a time when resources were extremely scarce, the number of homeless due to the floods in millions, with poverty levels rising one would be better placed to attribute blame where it is due.
What should be a source of serious concern to the 85 plus eleven-party cabinet is to question the decisions of the current economic team leaders that have contributed to a continuous rise in inflation – 28.5 percent as per the analysis report or 17 percent higher than budgeted; half of which can be laid at the doorstep of the rise in domestic borrowing, a highly inflationary policy, as the budgeted inflows from external sources will remain under stress till the ninth review is finalized.
Copyright Business Recorder, 2023
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