EDITORIAL: Two and a half months after the staff-level agreement was reached on the Stand-By Arrangement with the International Monetary Fund (IMF) on 29 June, with approval from the Board on 12 July subsequent to meeting all the harsh upfront prior conditions, the monthly economic update and outlook issued by the Finance Division disturbingly indicates a worsening trend of all key macroeconomic indicators.
The list includes the two most desired forms of earning foreign exchange: (i) a decline in remittance inflows from 19.3 percent in July 2023 to 21.6 percent July-August 2023. While responsibility for this rests with the then finance minister Ishaq Dar’s policy to inanely control the interbank rupee rate - from October 2022 till 26 June 2023 - without having the foreign exchange reserves that would have allowed for market intervention yet there has been a further deterioration in remittance inflows in spite of the reversal of this policy.
Caretaker Finance Minister Dr Shamshad Akhtar announced an 80 billion rupee package to incentivise remittance inflows through official channels, yet time will tell whether those who naturally opted to use the illegal hundi/hawala system in light of Dar’s policy decision will now prefer the legal channels to remit money to their families.
Business Recorder fully supports this measure though in the event that it does not succeed, the taxpayers may legitimately demand an explanation as the 80 billion rupee approval was given without first undertaking an empirical study of the likely impact of such a decision; and (ii) exports declined from 4.6 percent in July to 8.3 percent July-August.
The Commerce Minister, a member of the powerful All Pakistan Textiles Mills Association, is on record suggesting incentives to raise exports including fiscal and utility tariffs as well as monetary incentives associated with cheaper borrowing rates – measures, if adopted, would violate key components of the agreement with the Fund.
What is further disconcerting is that the summary presented during the Economic Coordination Committee (ECC) of Cabinet meeting dated 3 October by the Ministry of Planning, Development, and Special Initiatives cautioned that interest payments pose a major challenge to adjust the fiscal deficit downward.
However, it is domestic debt repayments which have risen dramatically and are the cause of a widening fiscal deficit, a highly inflationary policy.
There is no doubt that reliance on domestic debt increased last fiscal year due to the cessation of all bilateral and multilateral assistance attributed to sustained failure to meet the Fund conditions agreed under the then ongoing Extended Fund Facility programme and with the country’s rating downgraded access to equity borrowing and from foreign commercial banks also dried up.
This explains why the mark-up on domestic debt rose from the 2022-23 budgeted amount of 3.439 trillion rupees to 4.795 trillion rupees in the revised estimates (39.4 percent rise) and a budgeted rise to 6.430 trillion rupees in the current year (87 percent rise from the budgeted amount last year and 34 percent raise from the revised estimates of last year).
This compels one to conclude that the high discount rate of 22 percent at present is not only crowding out private sector borrowing (from negative 116 percent in 2022-23 to negative 222.8 percent projected for the current year) but also raises the mark-up on domestic debt component of the budget’s current expenditure: from 45.5 percent of current expenditure in the revised estimates of last year to 48 percent for the current year.
Inflation with possible socio-economic consequences is on the rise and reached an average of 26.1 percent last fiscal year and 27.8 percent in August this year rising by 4 percentage points in September.
The Caretakers will no doubt attribute this rise to the conditions agreed in the SBA; however, they must also acknowledge that it is the responsibility of whoever is in power for however short a time period to not only accept responsibility for the indicators that are released during their tenure but also to propose mitigating measures.
Thus, while the Caretaker government was quick to divert 80 billion rupees to incentivise remittance inflows through official channels yet it has announced no policy decision to check inflation that has broken the back of many a lower middle to middle income earning householder.
And one obvious economically most feasible option is for it to engage with all the influential stakeholders who are the major recipients of current expenditure to sacrifice their budgeted allocations for this year to not only minimize the need to borrow domestically but also externally.
That way alone lies the possibility of reversing some of the poorly performing macroeconomic indicators that account for the World Bank lowering the growth estimates for the current year and providing relief to the general public through a lower deficit than budgeted or projected.
Copyright Business Recorder, 2023
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