FY23: a very bad year for economy

The Economic Survey of Pakistan (2022-23), released by the Ministry of Finance (MoF), as per tradition a day before the national budget presented on June 9, 2023, for the outgoing financial year provides a detailed account of the country’s economic performance for fiscal year (FY) 2023 based on the data available till April 30, 2023 and projections for May-June 2023.

It testifies to the fact that throughout FY 2023, the economy remained affected by political instability and chaos, catastrophic unprecedented floods, and challenges arising from global and regional conflicts.

The Survey is a reminder that the continuous poor economic management of the successive governments has brought the country to the brink of default. Unfortunately, the agenda of moving towards sustainable macroeconomic stabilization through rationalization on expenditure side, revenue optimization, removing unproductive subsidies, and scaling down the budgetary deficit, remained unfulfilled.

Provisional estimates of National Accounts reveal that GDP growth rate is restricted to a meager 0.3% in FY2023, as compared to 6.1% in FY2022.

The agricultural sector grew by 1.55% followed by 0.86% growth in the service sector, whereas the industrial sector witnessed a decline of 2.94%. The agricultural sector suffered a damage of approximately Rs. 800 billion due to heavy monsoon spells in July-August 2022 which also caused historic floods having negative consequences for the main sub-sectors—crops

and livestock. Cotton production got reduced to 4.910 million bales compared to 8.329 million previous year, depicting a decline of 41% while production of rice was limited to 7.322 million tonnes, a decline of 21.5% as against 9.323 million tonnes previous year.

Import restrictive policies of the State Bank of Pakistan (SBP) and repeated upward revisions in policy rate had proliferated the challenges and risks for business. Because of these reasons, the industrial sector posted a negative growth of 2.94% in FY2023.

The aforementioned factors, affecting the overall condition of economy, specifically retarded the services sector, which constitutes the largest share of 58% of GDP. It posted a marginal growth of 0.86% in FY 2023.

A stable economy with a business-friendly policy rate and a functioning exchange market is essential for Pakistan. The sooner these goals are achieved, the better it is for the country and nation as their absence is taking a direct and heavy toll on businesses and across industries such as automobiles, cement, and construction.

The automobile sector has faced a considerable decline in productivity between July 2022 and March 2023, which is directly attributed to import restrictions, unprecedented downward slide in the value of Pak rupee, high policy rates, and rise in the rates of sales tax and withholding taxes, imposition of capital value tax on vehicles—severely impacting the growth of this industry, resulting in revenue loss of billions of rupees for the government and causing substantial unemployment.

The cement industry also witnessed a significant decline. Local sales and exports registered a decline of 17.6%, coming down to 33.6 million tonnes during July-March FY2023 from 40.8 million tonnes in the corresponding period of FY 2022. The decline in production is indicative of the fact that the construction industry is passing through an extremely difficult phase due to abnormal increases in the cost of construction, thus, reducing activity level considerably.

The constantly high level of inflation has significantly pushed the cost of living upwards as well as that of doing business that is fast losing its competitive advantage in the international market. There is unabated inflationary pressure for the last eighteenth months.

Since November 2021, the country has been witnessing a double-digit inflation. Consumer Price Index (CPI) in May 2023 stood at 38% on a year-on-year (YoY) basis which was higher than 36.4% in the previous month and 13.8% in May 2022. The latest report for May 2023 shows that it remains all-time high in the history of Pakistan.

Throughout the FY 2023, Pakistan has been facing a severe liquidity crunch, especially on the external front. The country’s access to fresh external resources remained restricted, mainly due to the fact that Extended Funded Facility (EFF) from the International Monetary Fund (IMF) remained in limbo. Consequently, the economic managers adopted a funnel-based approach in which the outflow of dollars was restricted through administrative and policy-based restrictions as the government was only facilitating “critical and essential payments”.

The current account balance due to restrictive measures continues to be bottom line positive for the third consecutive month in May 2023. Based on the results issued by SBP, current account in the month of May 2023 recorded a surplus of US$ 255 million.

During the period of July to May 2023, Pakistan successfully reduced its cumulative current account deficit (CAD) by 81% while overall CAD has seen US$ 2.9 billion decline compared to US$ 15.16 billion in the same period last year.

It is pertinent to mention that for FY2023 IMF estimated that CAD would be recorded at US$ 9 billion, whereas the present government’s measures show further improvement in it by end of FY 2023.

On the contrary, tightening of monetary and fiscal policy, along with administrative steps taken by the government, has resulted in an unstable exchange market. Experts believe that due to the gap between official and unofficial rates of local currency, workers’ remittance witnessed a decline of US$ 3.6 billion or 13% in 11 months of the current financial year.

Similarly, import restrictions together with poor domestic economic conditions, have resulted in a decline of US$ 3.56 billion or 12% in exports although this reduction plus that of foreign direct investment (FDI), and remittances were marginalized through policy-induced contraction in imports, creating a demand compression.

However, its continuance in the long run can further accentuate economic challenges. Strangely, despite these mammoth issues the government and its functionaries seem to be in a state of inertia when it comes to developing a comprehensive and robust framework for revival of economy.

The government is continuously shying away from its responsibilities of improving ease of doing business and offering an enabling environment where businesses can flourish and grow to provide a path for sustainable economic recovery. It is high time we direct our resources and focus towards sectors like agriculture, livestock, information technology, large scale manufacturing, and growth of small and medium enterprises by offering them a conducive environment and friendly policies that can lead to increased competitiveness, improved productivity thus unleashing their export potential.

(Huzaima Bukhari & Dr. Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions)

Copyright Business Recorder, 2023