Economic round-up 2021-22

The just concluded fiscal year has been tumultuous. It was both economics and politics that made it extraordinary, unparalleled in the recent history of Pakistan. We review the year’s performance and contrast it in a historical perspective to see why our economy faces an almost regular cycle of booms and busts.

The year FY2022 started with great hope. Pakistan had successfully overcome the disruptions caused by Covid-19 which had devastated a number of world’s economies. For the first time in Pakistan Tehreek-e-Insaf’s (PTI’s) tenure there was respectable growth of 4% which was revised to 5.6% after re-basing of GDP, despite almost negligible current account deficit (CAD) of less than 1% of GDP or $2.8 billion.

The low CAD was in itself culmination of a series of policies PTI adopted after declaring the CAD of FY2018 as the biggest economic challenge it had inherited from the PML-N Government and for which a number of major initiatives were taken including significant devaluation, doubling of interest rate and a major tax effort. The year also saw a major increase in tax collection, which was stuck in the range of Rs 3.8 trillion for the last many years, which then rose to Rs 4.8 trillion.

Both agriculture and industry had shown exceptional growth, particularly large scale manufacturing (LSM) which bounced back with a massive growth after Covid-affected decline during FY2020. Also, the International Monetary Fund (IMF) programme, which was stalled after First Review due to Covid, was also revived and 2nd, 3rd, 4th and 5th Reviews were successfully completed in March 2021, clearly a testament to strong economic turn-around.

Encouraged by the results of FY2021, the government announced a budget which was not just growth oriented but provided significant incentives for business promotion. In fact, it was this confidence that led to postponement of the IMF programme's 6th Review, which was due at the time of the budget. The macro targets included 5.8% growth and 8% inflation.

If economic expansion was the aim, within few months, it was evident that this aim was well within reach. During the first quarter, imports shot up to $19 billion compared to $11 billion a year ago, showing a staggering growth of 73%. This was backed up by significant increase in LSM which grew 5.2% and key agriculture kharif crops (cotton, rice and sugarcane) reached unprecedented levels. But what was emerging as a challenge was the CAD, which against a full year deficit of less than $2 billion rose sharply to $3.5 billion, showing an increase of 75% over the full year CAD of FY2021.

These trends only accentuated in the second quarter. During Jul-Dec, imports accelerated to reach $41 billion compared to only $24 billion, showing a growth of 71% over last year. It was then no surprise that CAD rose to $9.1 billion compared to a surplus of $351 million last year.

The LSM growth accelerated to 7.3% on a new base of 2015-16 as opposed to 2005-06. Consequently, the reserves had begun to decline and there was no escape but to ask the Fund to do the Sixth Review. However, a steep cost was incurred to achieve this in the form of a mini-finance bill levying significant taxes effective January 1, 2022. The Fund completed the review in February 2022. The government also announced the results of re-basing of GDP which led to a huge increase of 26% in nominal GDP from Rs.53 trillion to Rs.67 trillion for FY2022.

But the revival of the Fund programme didn’t lead to the reversal of trends engendered from the start. During Jul-Mar, imports rose to $59 billion over $39 billion last year, an increase of 51%. Again, the CAD rose to $13.2 billion compared to a small surplus of $275 million last year. LSM grew even fast at 10.3%. The reserves decline continued unabated and was down to $11 billion in End-March from a high of $20 billion in August 2021.

In the month of March, the government faced a no-trust motion and economy took a major hit. The attention of policymakers shifted to political management and the economy and its needs took a back seat. Then in the first week of March, not only did the government announce a reduction in POL and electricity prices, it also announced freezing of these prices until June.

This was a major departure from the undertakings given to the Fund as part of the approval of Sixth Review just a few weeks earlier. More importantly, this led to the re-emergence of price differential claims (PDCs) practiced widely during 2007-08 in the wake of global financial crisis when oil price jumped to $150/barrel which meant selling POL products below the cost. All this happened at a time when international oil prices were on the rise and uncertainty loomed over the horizon.

The new government came to office in April and took some time before it reversed the price freezing order, which led to high inflation. But apparently, there was not much of a slowdown in imports which touched $80 billion by June, an unprecedented level. Although BOP (balance of payment) data is yet to be announced, CAD is likely to be around $18 billion.

LSM growth continued unabated. Fiscal position deteriorated beyond everybody’s expectation as federal fiscal deficit was estimated at Rs 5,600 billion against the budgeted level of Rs 3,800 billion. The reserves’ position was significantly compromised both because of difficulties in controlling demand as well as the delay in receipt of IMF tranche and other concessional flows. Growth jumped to 6%, but cost was high.

While it is sad to see such an end of a hopeful year, in many ways it has ended in a characteristic fashion of many such years in the recent history of Pakistan. PML-N (Pakistan Muslim League-Nawaz) had successfully completed an IMF programme during 2013-2016. But the gains were soon sacrificed on the altar of pushing the growth beyond the capacity of the economy. There was also the issuance of the Panama Papers which turned into a major crisis for the Government and eventually led to the disqualification of Prime Minister Mian Nawaz Sharif.

The succeeding economic team was indifferent to gains made under the Fund programme and also an election was looming in July 2018. The fiscal deficit of 4.6% in FY16 shot up to 6.6% in FY18 while a modest CAD of $5.0 billion in FY2016 rose to a record level of nearly $20 billion. All this was done to achieve a high growth rate of 5.8% which was subsequently revised to 6.3% after rebasing of GDP.

A similar situation happened during the last year of PPP (Pakistan People’s Party) government in which no growth was witnessed but it happened in the backdrop of failure to resurrect the stalled IMF programme and running down most of the reserves, built while under the IMF programme, to a dismal level toward the end of its term in FY2013.

Even a relatively stable government of President Musharraf succumbed to similar pressures of growth and voters appeasement. In its last fiscal year 2007-08, in the backdrop of three developments, namely judicial crisis, planned elections in January 2008 and the world financial crisis, the Government decided not to pass the higher POL prices on to consumers, leading to emergence of PDCs and doubling of the fiscal deficit from 4% budgeted to about 8% actual. CAD was all time high 8% of GDP. The government of PPP was forced to approach the IMF in October 2008. Thus relatively good performance of that era ended on a whimper.

Copyright Business Recorder, 2022