EDITORIAL: The December Monthly Economic Update and Outlook, uploaded on the Finance Division website, indicates the two extremely disturbing elements that not only continue to persist but have worsened since 20 August 2023 when the Caretaker Cabinet took oath of office.
First, the low base of key macroeconomic indicators during July-December 2022 did not lead to any appreciable improvement in the comparable period of the current year and in some instances worsened – a low base which was the outcome of Ishaq Dar’s flawed policies ranging from artificially controlling the interbank rupee-dollar parity, giving rise to multiple exchange rates that cost the country 4 billion dollars in lost remittances, and upping the current expenditure from what was budgeted by 21 percent in spite of the cessation of foreign inflows due to the suspension of the ninth review of the then ongoing Extended Fund Facility (EFF) programme.
Those indicators that actually impacted negatively on the economy in general and the quality of life of the general public in particular during July-November 2023 as opposed to the comparable period of the year before are: (i) remittances declined by 10.3 percent – a decline notwithstanding the announcement by the caretaker finance minister on 15 September that 80 billion rupees will be disbursed to incentivise remittance inflows through official channels with 20 billion rupees released the next day; (ii) credit to private sector, a major input for large scale manufacturing (LSM) sector registered negative 64.2 percent July-October this year compared to positive 40.3 percent last fiscal year.
This contributed to negative 0.44 percent growth in LSM July-October 2023 though the comparable figure for the same period in 2022 is worse, at negative 1.67 percent; yet what is concerning is the October 2022 LSM growth statistic of negative 1.40 percent against negative 4.08 percent in October 2023.
This decline in credit to the private sector was due to a 200 percent rise in government’s domestic borrowing – 2.876 billion rupees this year against 961 billion rupees the same period in the previous year and needless to add that this accounts for a consumer price index of 28.6 percent this year compared to the 25.1 percent last year.
The report bafflingly notes that “despite significant challenges the overall economic outlook is optimistic marked by receding inflationary pressures”; (iii) non-tax revenue rose by 358 percent July-October 2023 compared to the year before and sadly the reason is mainly attributable to a heavier than ever reliance on petroleum levy, which is an indirect tax and which is yet another contributor to inflation; and (iv) the deficit was down by 31.9 percent this year (from 1266 billion rupees July-October 2022 to 862 billion rupees in the same period of this year); however, this was at the cost of a 21.8 percent reduction in Public Sector Development Programme (PSDP) disbursements with implications on growth. And primary balance (minus borrowing costs) rose from 136 billion rupees in July-October 2022 to 1430 billion rupees in the same period of 2023.
There was a slight improvement in exports - from 11.9 billion dollars to 12.5 billion dollars this year - and a 64.5 percent decline in current account deficit due largely to a regulatory containment in imports - of 16 percent - which effectively contributed to lower LSM output leading to redundancies.
The Update shows an improvement are stock exchange index (by 40.6 percent), market capitalization in rupees (by 33.8 percent) and in dollars by 35.4 percent incorporation of companies by 7.9 percent. However, the stock market players are few in this country with the poor, the lower middle and the middle income earners not considered as players, and the market capitalization may reflect the domestic rupee erosion and the rise in dollar terms perhaps indicative of the recent rupee strengthening.
And finally, the report notes “positive prospects in agriculture, signs of potential recovery in the industrial sector reflected by positive trends in high frequency indicators, imports and a favourable external environment.” While farm output is on the rise, contributing 11 percent to total GDP growth, attributed to a natural bumper crop year subsequent to floods last year, yet one is forced to disagree with the rest of the rosy picture with the sole objective of strengthening the hands of the stakeholders to take appropriate mitigating measures now: the LSM data cited above is in contrast to the high frequency indicators, declining imports through the measures adopted are not supported by multilaterals/bilaterals and will have to be reversed sooner rather than later, and the external environment remains bleak as rating agencies have not upped our rating which makes our capacity to borrow from the commercial banking sector abroad as well as through issuing Sukuk/Eurobonds budgeted at 6.1 billion dollars untenable.
The report cites the 2.13 percent growth rate in the first quarter as a major achievement, however, this must be viewed in the context of a very low base last year - negative 0.5 percent growth (as per the IMF website) and negative 0.6 percent as per the World Bank while projecting a 1.7 percent growth for this year – and a surge in farm output this year that is attributed to external conditions and not to any improvement in the sector.
Pakistan can no longer afford complacency and for its economic leaders to insist on a picture that is unrealistic just to show their performance in a good light.
The need to implement structural reforms with the potential to fuel growth in the medium to long term is critical as is the need for the government to slash current expenditure as opposed to development expenditure.
Copyright Business Recorder, 2024
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