EDITORIAL: The Ministry of Finance in its July Outlook noted that economic recovery remained intact in June, implying that the growth rate of 3.94 percent announced in the last week of May, which came as a welcome surprise to the government as well as multilaterals, including the International Monetary Fund (IMF), will not be downgraded.
However, the figures for July-June (entire fiscal year) 2019-20 and 2021 pertain to remittances (which rose from 23.1 billion dollars to 29.4 billion dollars), exports that rose from 22.5 billion dollars to 25.6 billion dollars and a rise in imports from 43.6 billion dollars to 53.8 billion dollars. This implies the trade deficit rising from 21.1 billion dollars to 28.2 billion dollars - nearly 34 percent - that is not highlighted in the Outlook though it notes that "higher imports (raw materials and semi-finished products) of commodities indicate improvement of related sectors........in the transition towards a higher potential growth level pressure can be built on external accounts." Current account deficit however declined from 4.4 billion dollars to 1.9 billion dollars due to remittance inflows.
Foreign direct investment inflows declined from 2597.5 million dollars in 2019-20 to 1847.4 million dollars in 2020-21 no doubt attributed to a slow down of projects under the China Pakistan Economic Corridor (CPEC) with many massive infrastructure projects already completed. The reason: the issuance of debt equity by the government notably sukuk and Eurobonds as well as inflows under Roshan Digital Account due to the rate of return on offer which is nearly double than what is available globally.
The foreign exchange reserves for July-June 2019-20 were 11.976 billion dollars rising to 17.812 billion dollars last year though not mentioned is the rise in debt equity, swaps and other external borrowing which account for more than 50 percent of the foreign exchange reserves. Exchange rates were 167.26 on 24 July 2019-20 and 161.23 on 26 July 2021; however, its decline from 152 rupees to the dollar in May 2021 when the turnaround in the economy was first identified must be disturbing for the Ministry of Finance that set a rate of 153 rupees to one dollar while making its budget calculations.
The rest of the critical data shared in the Outlook does not include June 2021 and therefore a comparison includes July-May 2019-20 and 2020-21. Some questions can be raised on this account: (i) FBR revenue rose from 3.99 trillion rupees to 4.73 trillion rupees or a rise of 18.4 percent on the back of a growth rate that is double what was projected and an inflation of 8.9 percent. Given that in the current year the FBR has projected a growth of 236 billion rupees based on a growth of 5.02 percent and 385 billion rupees for inflation of 8.2 percent the performance of FBR in 2020-21 may require a revisit down the line; (ii) credit to private sector rose from 186.5 billion rupees to 594.6 billion rupees on the back of an accommodative monetary policy however the percentage of credit to private sector versus the government is the lowest in Pakistan in the region - 17 percent as per an IMF 2020 study which as per State Bank of Pakistan (SBP) data was at around 33 percent in 2021. In addition, government domestic borrowing rose from 16.5 trillion rupees when the PTI government was assumed office to over 25 trillion rupees today; (iii) large-scale manufacturing (LSM) sector began with a very low base of negative 10.2 percent July-May 2019-20 to 14.6 percent in July-May 2020-21 so while this may be a positive development on the back of the appalling performance in 2019-20 (attributable to the severely contractionary monetary and fiscal policies) yet a more incisive analysis is required to ensure sustained growth; and (iv) the government spent 206.7 billion rupees on the Ehsaas, its flagship programme for the poor and the vulnerable. The programme is well intentioned and well administered however, the amount (based on the very narrow available fiscal space) and given the rate of inflation and the rise in poverty levels of over 40 percent of the population is simply not sufficient to meet the needs of the people of this country.
The Outlook devoted two and a half pages out of 12 to international performance and outlook given the continuing onslaught of the pandemic on the global economy necessitating the continuation of accommodative policies in the developed countries which are impacting on economies around the world, including Pakistan. However, with the fourth wave in the country the government would have to be careful not to take policy measures that would compromise growth either in LSM or agriculture. Finance minister Shaukat Tarin has already stated that the government would remain focused on growth; however, he has yet to demonstrate the success of his policies to the IMF which in turn would determine the outcome of the sixth review scheduled for next month. It is likely that the talks will be conclusive because of higher than targeted tax collection by FBR in July (provisional figures) that gives hope that the tax target is likely to be met by then while expenditure can be curtailed to meet the deficit targets. The power sector reforms that are yet to be put on the table may be fine-tuned by the World Bank and agreed by the government to ensure the success of the sixth IMF review.
Copyright Business Recorder, 2021
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