ISLAMABAD: Pakistan’s financial account has not been positive enough to cancel out the increase in current account deficit (CAD) as expected following an increase in imports.
This was pointed out by former finance minister Dr Hafeez Pasha, while speaking at “Paisa Bolt Hai”, an Aaj TV programme with Anjum Ibrahim.
Pasha stated that the expectation was that the financial account would be positive to the extent that it would offset the negative current account deficit due to an increase in imports but this has not happened.
Jul-Aug CAD declines 54pc to $935m YoY
He added that by middle of July 2023, Pakistan reserves were at a new peak of $8.7 billion subsequent to disbursement of $1.2 billion by the International Monetary Fund (IMF) and $3 billion by friendly countries; however, the reserves have started to decline and at last count they were at $7.7 billion.
He said the target is that reserves of the country should be at $9 billion by the end of this fiscal year. Pasha appreciated the crackdown on currency speculators but expressed serious reservations over the possibility of the ongoing rupee appreciation through regulatory and administrative measures reaching a level where imports begin to increase and exports fall due to an overvalued rupee thereby putting pressure on the balance of payments.
In the first two months, current account deficit has reached almost $1 billion and an increase in imports has not yet reached the level of 20 per cent as projected by the IMF, he added.
Pasha further contended that the budget deficit during the first two months has risen significantly beyond the target of the current fiscal year as the Federal Board of Revenue (FBR), despite achieving 26 per cent increase in revenue, is unlikely to achieve the unrealistic 38 per cent increase required for the entire fiscal year.
In addition the projected budget surplus by the provinces of Rs600 billion may not materialise given the fact that provincial governments have shown deficit in the first two months and Punjab caretaker government had a major hand in budget deficit. Additionally, he said that budgeted revenue on account of petroleum levy is unlikely to materialise as it was not increasing as per projection due to a fall in consumption.
He argued that a further increase in price of petroleum products would further decrease consumption of petroleum products and thereby the revenue materialisation on this account appears highly unlikely.
Pasha said that sharp decline in imports in the month of July 2023 points toward financial constraints of the country but at the same time, it creates fear of shortages of goods.
Pasha also pointed out that the numbers shared with the IMF by finance minister Ishaq Dar were “inappropriate” as budget deficit for the last fiscal year is higher compared to what was released by the Finance Ministry in fiscal operation, adding that Dar understated expenditure by Rs385 billion under the head of statistical discrepancy and wondered why the IMF failed to see this.
He said that the caretaker government’s focus so far is on administrative and regulatory measures, which would provide temporary relief but the real question is whether these measures would be sustained without bringing about essential long term and structured reforms.
Hafeez Pasha also criticised former finance minister Ishaq Dar’s policies of artificially controlling the exchange rate and restricting imports and stated that as a result of the flawed policies pursued by him after September 2022 the loss in remittance inflows through official channels was 4 billion dollars.
Pasha further stated that when the budget deficit rises due to an increase in expenditure – reliance on debt also rises, which in turn implies higher debt servicing payments. He added that debt servicing was Rs2 trillion higher as opposed to what was projected in the budget. And expenditure on other heads also rose which prompted the government to resort to borrowing to meet its increased borrowing requirement.
Pasha said that on the one hand, the government was borrowing from domestic banks, whereas, on the other hand, policy rate was increased to 22 per cent. As a result of all of this, monetary expansion (not backed by productivity rise) had a negative impact on price of commodities.
He said that there has been an increase of 30-35 per cent in pensions and salaries of government employees which would have Rs600 billion impact on budget expenditure of all five governments, whereas there is no or hardly any increase in private sector salaries.
Pasha expressed apprehension that all these developments simply showed that the target set in budget to generate primary surplus of 0.4 per cent would not be achieved unless the caretaker government mobilises additional revenue to absorb additional expenditure.
He said that the GDP rate, according to the PBS was 0.3 per cent but as per his their estimate it was negative by one to 1.5 per cent last fiscal year due to productivity decline following restrictions on imports.
He expressed serious concern that the Fund may have some major concerns over the failure of the caretaker government to meet the performance criterion for the first and second quarter reviews under the ongoing Standby Arrangement.
Copyright Business Recorder, 2023
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