Economic developments and business confidence

We have a mixed bag of economic developments. The foreign trade data for October shows encouraging signs. The exports at $2,371 million in October were down from $2,464 million last year, showing a small decline of 3.77%. They were also down by 3% relative to last month of September.

However, the exports during Jul-Oct period were recorded at $9,549 million compared to $9460 million for the same period last year, showing a marginal increase of 0.94%. This export performance is consistent with our earlier assessment that holding on to last year’s level of exports, on the face of global slow-down in demand, would be a heroic performance.

The imports at $4,636 million in October were from $6,369 million last year, showing a significant decline of 27.21. This is the lowest level of monthly imports in the fiscal year. Imports were also down relative last September by 13%. Overall during Jul-Oct imports were recorded at $21,018 million compared to $25,018 million, showing a decline of 16.2%. If this level of imports is maintained for the rest of the fiscal year, annual imports would be $58,106 million. This level of imports is consistent with the need for stabilizing the economy and remaining within the available foreign reserves.

During Jul-Oct period the trade account deficit was registered at $11,469 million which was significantly less than $15,624 million for the same period of last year, showing a decline of about 27%. With such low imports and reduced trade deficit, the current account deficit (CAD) would be well contained and within the target agreed with the Fund. Evidently, the policy of containing external deficit is proving effective.

The data on fiscal operations for the first quarter (Jul-Sep) is also out. Overall revenue increased by 11.5% relative to last year. Expenditures, on the other hand, increased by 26%. Consequently, fiscal deficit increased to 1% of GDP compared to 0.7% of GDP last year.

The primary balance is in surplus at 0.2% of GDP. The IMF programme targets fiscal deficit at 4.7% of GDP and primary surplus at 0.4% of GDP. Evidently, fiscal targets appear to be on track. However, it is important to assess how far the first quarter results make a good prediction for annual outcomes. We have analyzed the data on fiscal operations for last three years to answer this question. In the last years average first quarter deficit was 0.8% while primary surplus was 0.5%.

The final outcomes were fiscal deficit of 8% and primary deficit of 2.1%. Therefore, Q1 fiscal performance may be good to carry through the 9th Review but beyond that more work is required. In fact, major departures from previous practices is required to reign in the deficits.

The FBR has managed to perform as per its targets during Jul-Oct period. Against a four-month target of Rs.2.143 trillion, the actual collections amounted to Rs.2.148 trillion. But there has been a slow-down in collections as economy is slowing down, notably imports, and for second consecutive month the deadline for filing returns was extended. Going forward, it seems, revenue effort would be hampered.

The forex market remained volatile though the rate was oscillating between Rs.222/$ and Rs.220/$. The flow of new assistance from ADB and commitment from WB and AIIB have not resulted in releasing pressure on the rupee.

The details of Chinese and Saudi assistance, when finalized, would indeed impact positively on the sentiment. In the meanwhile, the government has tightened the forex regime by significantly reducing the limits of dollar purchases for travel and from open market. The government continues to believe that there is speculative activity going on in the market. It would be useful to also look at border points where persistent reports claim that cash outflows of foreign exchange have become a norm.

It has been noted by some analysts that the Fund programme has yet to acknowledge the devastation brought by the floods. The Fund programme was approved on 27th August when floods were already in full swing and yet there was no mention of the effects of floods in the MEFP or Staff Report.

After UN Secretary General’s visit the Fund issued a statement expressing grief and pledging that it would work with international community to play its due role in mitigating the sufferings of people. So far there is no formal announcement regarding the mode of Fund’s support. Two things could form their support.

First, access to emergency assistance similar to the one provided during COVID-10 and, Second, appropriate adjustors in performance criteria for fiscal and primary deficits, reserves build-up and external deficit. Undoubtedly, the adjusters would be commensurate with the expenditures (including higher imports) incurred for meeting contingencies due to floods.

The more challenging factor is the elusive political stability. There are many surveys showing close link between political instability and business confidence. The most recent survey was carried out by Gallup a week ago. As much as 65% of the businesses said that they are facing bad economic conditions. Paradoxically, 75% businesses relating to industrial machines claim they are facing good conditions. The machine business relates to investment and their claim of doing well is surprising. But at the retail level 81% of cloth and garment businesses say they are facing worst conditions.

The overall business confidence index in three key aspects has deteriorated markedly since Q1 of the calendar year. The assessment of current economic conditions has come down from plus 32 to negative 31, a downgrade of 53 points. Regarding the future prospects, it has come down from plus 40 in Q1 to negative 10 which is also a high downgrade of 50 points. Finally, regarding the direction of the country, it has come down from negative 12 to negative 75, a deterioration 63 points. The SBP/IBA surveys of consumer and business confidence, inflation expectations and future prospects have also shown deterioration but not so sharply.

With such disappointing state of consumer and business confidence, economic management is a heroic effort. It is imperative for all stakeholders to bring their heads together to work out a way to resolve political impasse through dialogue to avoid economic disruption, which otherwise looks imminent.

Copyright Business Recorder, 2022