EDITORIAL: Macroeconomic data released by various government agencies, including the Finance Division and the Pakistan Bureau of Statistics, is worrisome: (i) The Food and Agriculture Organisation’s (FAO’s) geospatial assessment projected over 9.461 million acres of cultivated crops destroyed and a large number of livestock lost due to floods; (ii) supply chain disruptions due to floods and elevated inflationary pressures due to monetary tightening and uncertainty in the financial market (though bafflingly no mention was made of fiscal tightening as well as the raise in utility prices as per the agreement reached with the International Monetary Fund in the seventh/eighth reviews – decisions that were taken by the Cabinet).
The report notes that Large Scale Manufacturing (LSM) registered negative 1.4 percent growth against 4.4 percent in fiscal year 2021-22; (iii) sales tax, a regressive tax, continued to be the major source of government revenue no doubt contributing to inflation and if one subtracts direct taxes levied as withholding taxes on consumer items and services in the sales tax mode reliance on sales tax continues to be prohibitively high – a reliance that requires an urgent revisit to the highly regressive tax structure of this country; in addition with a decline in non-tax revenue of 13 percent shrivels the positive impact of the increase in tax collections; (iv) current account posted a deficit of 1.9 billion dollars in July-August against 2.4 billion dollars in the comparable period of the year before.
Exports July-August rose by 500 million dollars, imports declined by 200 million dollars and remittance inflows declined by 200 million dollars giving a net gain of 100 million dollars – a gain that was eroded in the face of a massive decline in foreign direct investment by a whopping 26.1 percent, portfolio investment declined from 961.5 million dollars July-August 2021-22 to negative 25.1 million dollars in the comparable period of this year giving a total foreign investment decline of 87.8 percent; and (v) last but not least, foreign reserves have plummeted to 7.86 billion dollars on 28 September this year against 19.22 billion dollars in the comparable period of the year before though these were largely debt-based.
Data which directly impacts on the wellbeing of the people at large remained a source of serious concern not only to the general public but also to the eleven-party coalition government resulting in a changing of the guard at the helm of the Ministry of Finance included inflation of 26.1 percent against 8.4 percent July-August last year, a policy rate of 15 percent at present against 7.25 percent last year (a rate with implications on government indebtedness as well as on the capital input costs of the private sector), and a rupee-dollar parity (with a direct bearing on the cost of imported items including fuel and energy bills) of 169.97 on 28 September 2021 against 232.12 on the same day in the current year.
The newly-appointed Finance Minister, Ishaq Dar, who took oath on 28 September has tasked himself to check the rupee-dollar parity which, he maintains, is not reflective of its true value, contain inflation and achieve the primary surplus as agreed with the Fund.
The rupee began to strengthen soon after reports of Dar’s return began to circulate and from a high of 240.67 on 22 September it plummeted to 227 today, reflecting the market perception that speculators will be dealt with (banks as well as private individuals); however, unless Dar focuses on improving macroeconomic indicators through meaningful reforms this reprieve may be short lived.
Dar by reducing the price of petroleum and products, by passing on the international price decline while not raising the petroleum levy, would probably be able to dampen the inflationary spiral but for that to be sustained the international price of oil would have to remain at this level or ideally come down further.
And finally, as the primary surplus does not take into account the country’s debt repayments and with talk of deferment due to the floods effectively pleaded by the Prime Minister and the Foreign Minister during their recent visit to the US it is likely that the agreed surplus with the Fund may be achieved.
Dar during his previous stints as the finance minister was an ardent supporter of a low discount rate and a grossly overvalued rupee.
However, the current Fund programme is unlikely to allow that latitude to him as its staff has displayed a rigidity in phasing out the harsh conditions insisting on upfront conditions, read implement before a tranche is released, and any deferral has implied even harsher conditions than originally agreed as evident in the sixth and seventh/eighth review agreements.
It is, therefore, critical for the government to think out of the box, abandon previous flawed policies with some manipulated favourable indicators effectively camouflaging the deep-seated flaws in our economy, and desist from replicating past policies that have brought the country’s economy to its current extremely fragile state.
Copyright Business Recorder, 2022
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