EDITORIAL: Some circles in the government are trying to build up a narrative that current account is coming into surplus and with support from China and other friends, Pakistan can eliminate the need for the pending IMF (International Monetary Fund) programme.
This is nothing but an empty political slogan and politicians should refrain from making such irresponsible statements. Insofar as the matter of current account is concerned, this newspaper has argued many a time that the high surplus in March was a blip, and it seems that current account is largely going to be in balance (or marginally in surplus) till the import restrictions remain.
There is no earthly way that the current account could generate a $20 billion surplus to help the government repay the loans. Even considering some rollovers within the repayment period, the possibilities are being overstretched.
The current account’s improved position has not come without a cost. The imports in this calendar year so far are down to a third and non-food-non-oil imports are down to half. In the latest reporting, the Large-Scale Manufacturing is down by a 25 percent.
These are no small numbers. The economy is clearly shrinking, and it’s creating unemployment and high inflation simultaneously, a situation which is described by economists as “stagflation”. There are many industries that are either closed or partially operating.
The first axe of unemployment fell on contractual workers (also known as daily wagers) while others are to work on reduced salaries. Then in the value chain – part makers, distributors and retailers are facing the hit as well. And there is some employment loss there too.
The administrative measures to restrict some imports have created shortages in the market. With interest rates well below the inflation rate, producers kept on sitting on limited inventories and started demanding higher prices on the release of products. With growing expectations of an economic default and currency depreciation, sellers found buyers at higher prices with the result that prices of goods started to move up.
This hypothesis is echoed in a paper presented by a London-based economist, Ahmad Jamal Pirzada, in a recently held conference hosted by Lahore School of Economics, where he argued that high inflation despite falling growth in money supply, could be due to the growing economic default risk (which is linked to political instability) along with other factors.
Hence, by keeping in view the adverse impact of current account management on employment and inflation, the policy needs to be revisited as soon as possible. And there is no way any policymaker can think that this forced improvement is a way to avert default. Rather, it enhances the chances of default as lower imports and a shrinking economy are resulting in a higher fiscal deficit, and its financing is becoming even more challenging.
Federal government’s tax and non-tax revenues are falling due to the economic slowdown and import restrictions. On the other hand, expenditures are rather sticky and that is resulting in a higher deficit.
And, with restrictions by the IMF on borrowing from the central bank (SBP) amid tight domestic banking liquidity, the government must borrow from external sources. Otherwise, the risk of debt repayment default only increases.
Thus, the objective of import restrictions to avert default on the country’s debt repayments is creating another risk of generating financing to fund growing fiscal deficit — i.e., creating a risk of default. The government must work on the core issue which is fiscal and work on broadening the tax base in the upcoming budget.
Copyright Business Recorder, 2023
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