Spate of bad news

The release of economic statistics recently by the FBS and the SBP has magnified concerns about the state of the economy and adverse short-run developments. These statistics relate to various aspects of the economy like the public finances, balance of payments, rate of inflation, etc.
The first extremely disconcerting and perhaps unbelievable development relates to the position of Central Government debt, released recently by the SBP as of the end of June 2019. Apparently, there had been exponential growth in debt in 2018-19 which stood at Rs 31,784 billion on this date. This implies that the absolute increase was a staggering Rs 7,572 billion and the growth rate was as high as over31 percent. This rate of increase in Government debt has not been seen before.
The consequence is that Central Government debt as a percent of the GDP has gone up in one year only by 12 percentage points, from 70 to 82 percent of the GDP. Almost 40 percent of the increase is due to the rise in the value of external debt due to the big depreciation of over 34 percent in the value of the rupee with respect to the US dollar.
The implication of the big increase in Government debt is also that the budget deficit has been extremely high at Rs 4,630 billion in 2018-19 as compared to the target of Rs 1,970 billion. However, the Government has clarified that a part of the increase is due to the special build up of a cash balance of Rs 1,200 billion with the SBP. But even if this is netted out, the fiscal deficit remains very high at Rs 3,430 billion, equivalent to 8.9 percent of the GDP. This is perhaps the highest deficit ever.
The second worrying development relates to the relatively low growth in FBR revenues, net of receipts from the Asset Declaration Scheme, in July 2019. Final numbers have not been released by the FBR, but media reports indicate that the growth rate may not be above 10 percent. The first month of the new financial year has no doubt been affected by the adverse public reaction, especially by traders, to the heavy additional taxation in the 2019-20 Federal Budget. Nevertheless, the FBR has a long way to go if it is to achieve the target growth rate in tax revenues of almost 45 percent this year.
The second area of concern relates to the short-run spurt in the rate of inflation as measured by the weekly Sensitive Price Index (SPI), consisting mostly of food items. The inflation rate stood at 14 percent in the beginning of June, just prior to the Budget. Since then it has jumped up to over 19 percent by mid-August. This is a very big increase in only ten weeks. Hopefully, this is temporary and caused by the seasonal escalation in prices prior to the Eid-ul-Azha. However, the price control mechanisms at the local level will have to play a more effective role.
The last information on change in the Quantum Index of Manufacturing (QIM) provided by the PBS was for May 2019. The fall in industrial production has persisted and continued to worsen. For the first ten months the cumulative decline was 3.5 percent, which has persisted with a fall of 3.8 percent in May 2019. Nine out of the fifteen industry groups have registered negative growth. The slump in the manufacturing sector is widespread.
There are also worrying developments on the balance of payments front. Despite substantial deposits of over $5 billion by Arab countries with the SBP, the overall financial account has worsened by 15 percent in 2018-19. This is due to less financial assistance by the traditional sources like the Multilaterals. In fact, in June 2019, there was a negative inflow. The disbursement was $997 million, while the amortization was higher at $1,036 million. This should, of course, change after the onset of the IMF Programme.
The month of July 2019 has witnessed a low growth in home remittances despite the approaching Hajj and Eid-ul-Azha. It is reported by the SBP at 3 percent only, with decline in inflows from other GCC and EU countries. Earlier, the year, 2018-19, had witnessed buoyancy in home remittances with a growth rate above 10 percent.
Another finding relates to the newly computed Real Effective Exchange Rate (REER) Index by the SBP and released recently. The new index has updated the base year, included more currencies and revised the trade weights. According to this index, the REER has been falling steadily since May 2017, reaching a low of 90.5 in June 2019. This implies that the rupee is now actually undervalued by almost 10 percent. The earlier index had a value of close to 100 in June 2019. Apparently, the time has come to prevent further depreciation in the value of the rupee.
The month of 2019 has witnessed a persistent decline in the net inflow of foreign private investment. It has fallen by 58 percent in this month, as compared to almost 60 percent over the full year. There has been a net outflow of foreign portfolio of funds of $415 million in 2018-19. This is 72 percent more than the outflow in the previous year. Clearly, this is one of the factors contributing to the plummeting of the stock market, a process which continues unabated.
The final negative short-run negative development which is visible is the contraction in private sector credit from the banking system. Some of this is seasonal in nature. However, the decline up to 2nd August 2019 was Rs 135 billion, three times the fall in the corresponding period of last year. In fact, in 2018-19 the credit off-take by the private sector fell by over 10 percent. The message is clear. The private sector is becoming increasingly shy in the face of a slowing economy, rising cost of machinery and higher interest rates.
Overall, there is bad news on a number of fronts with regard to the state of the economy. Hopefully, the depression will be broken by some positive news. Perhaps in the next few days we will hear the goods news that the trade deficit and the current account deficit have fallen sharply in the month of July 2019.
(The writer is Professor Emeritus at BNU and former Federal Minister)