EDITORIAL: The April Monthly Economic Update and Outlook uploaded on the Finance Division website begins on a positive note: “the economic journey in the ongoing Fiscal Year 2024 has been optimistic,” however the very next sentence correctly highlights the foremost factor that spearheads this optimism: “recently International Monetary Fund’s Executive Board has approved the second review under the Stand-By Arrangement for Pakistan allowing for an immediate disbursement of 1.1 billion dollars.”
This disbursement increased the reserves held by the State Bank of Pakistan (SBP) to 8006 million dollars (26 April 2024) against 5310 million dollars on the same date in 2023 but what is disturbing is the fact that the remaining 6.9 billion dollar reserves held by the SBP are less than the sum total of roll-overs allowed by the friendly countries – China, Saudi Arabia and the United Arab Emirates.
In all fairness the report does acknowledge that “these improvements are primarily due to favourable external conditions,” however, what is difficult to endorse is the second part of its claim, notably and “sound prudent policy management.”
The rise in reserves did not reflect a rise in desired foreign exchange inflows given that there was: (i) no appreciable rise in remittance inflows, which registered a rise of only 200 million dollars, even though last fiscal year remittances had plummeted by 4 billion dollars due to the inane policy of artificially strengthening the rupee-dollar parity; and (ii) a contraction in the July-March trade deficit which registered at negative 15 billion dollars against negative 21 billion dollars in the comparable period of the year before; however, the decline was due to administrative measures designed to contain imports which effectively had a negative impact on productivity. Or, in other words, large scale manufacturing sector July-February 2024 was calculated at negative 0.51 percent against negative 3.97 percent in the same period of last year, yet this improvement fails to take account of the flawed policy decisions by the then finance minister Ishaq Dar that led to an extremely low base of all major macroeconomic indicators plus the productivity remains in the negative realm. This in turn is no doubt a function of the policy rate – 2 percent above the 20 percent discount rate applicable on 2 March 2023 – as well as the massive rise in government borrowing from the domestic sector this year due to Pakistan’s inability to procure commercial loans and issue debt equity (sukuk/Eurobonds) as budgeted due to a low rating which crowded out private sector borrowing accounting for a 54 percent drop in credit to the private sector July-5 April 2024 as opposed to the same period last year.
The Update and Outlook notes that the growth rate was 2.5 percent in the first quarter of the current year and 1 percent for the second quarter (third quarter compilation is earmarked for 20 to 24 May). Growth was projected to be led by bumper crops exceeding targets; however, with the flawed decision to import wheat there is a distinct possibility that surplus domestic wheat, surplus to demand, may go to waste as there is not enough storage capacity to accommodate wheat.
The Outlook claims a decline in inflation with a rate of 20.7 percent in March 2024 against 35.4 percent in March last year. This is a major decline; however, the Consumer Price Index (CPI) July-March this year was cited as 27.1 percent while the rate for the same period last year was 27.3 percent.
This minor decline would no doubt not be felt at the grass root level and if one takes account of the expected condition of the IMF team scheduled to initiate negotiations for yet another programme this month one would be hard-pressed to argue that the government will be able to convince the Fund to phase-off the harsh upfront conditions relating to utility rates and petroleum levy.
Collections by the Federal Board of Revenue have risen by 30.2 percent and needless to add one-third of this rise is due to inflation and the rest due to higher taxes on existing taxpayers. One would hope that widening of the tax base by reducing reliance on direct as opposed to indirect taxes, whose incidence on the poor is greater than on the rich, is begun in earnest.
And as Business Recorder has consistently maintained there is an emergent need to slash current expenditure which may require voluntary sacrifices by influential recipients for at least two to three years, initiate pension reforms as they are unsustainable and deal with all those entities/sectors where mismanagement and corruption are rife.
Copyright Business Recorder, 2024
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