Challenge of lower growth: IMF bailout insufficient

The IMF Staff-Level Agreement (SLA) for $7 billion programme is done. However, that does not ensure revival of the economic growth which is necessary for the young population.

The government expects 3.5 percent GDP growth in FY25, but it would be a surprise if the toll surpassed 3 percent.

FY25 started at a weak momentum in the manufacturing and services sector which is positive for growth numbers in a way as it is likely to jump from a very low base.

For example, Large Scale Manufacturing (LSM) was down by 10 percent in FY23 and remained flat in FY24; and a slight bounce back will bring it back to green. Similar is the story of wholesale and retail trade in services.

However, the outlook on agriculture is ominous. FY25 is starting on a high base (last year’s growth was 6.25 percent which is substantially higher than the previous five years average growth of 3 percent.

The farm economics does not look good this year. One, the low (or absence of) wheat support price has adversely impacted the returns on investment for farmers. Second, the harsh summers may have a dent on the cotton crop in Sindh, and the risk of erratic monsoon may impact the output in Punjab negatively.

Then the rice bonanza of last year (due to absence of India in the exporting market) is going to be over. The higher taxation on exports is not going to augur well for rice and other agriculture exports.

All these factors are reflected in the farm economy where the rates of land lease rates (theka) are down by 20-25 percent in certain parts of Punjab. Then, the new elephant in the room will be agriculture income treated as taxable beginning 1st Jan 2025. This could have a toll on the growth.

The overall agriculture output and income would be challenged and that shall have an impact on the demand of various goods and services in the rural economy.

The situation of the urban economic dynamics is not good either. Here, the higher taxation on salaried and non-salaried income will squeeze the disposable income. Then, the ending sales tax exemption on various products being consumed by urban middle class will further erode the purchasing power.

This can dampen the economic growth and employment generation. Already, sales in a few sectors are multiyear low – such as cars sales in FY24 is at 15 years low while 2-wheelers’ sales are at 9 years low, Cement domestic sales and petrol consumption is at 7 years low. The story is similar in many other sectors.

There might be some bounce back in auto sales, but this would remain significantly low from its peak in FY22.

The cement and steel sales are likely to remain bleak as new taxation measures can keep the real estate sector depressed. Exporters are postponing expansion. However, volumes of textile exports are likely to remain high in the next few months.

The business and consumer sentiments after the budget are not encouraging. There is no feel-good factor – be it rich industrialists exporters, SMEs, professionals and public at large. Local investment shall be hard to come by.

FDI is low anyways and all existing investors want smooth repatriation of dividends and profits. Those who had investment plans will delay them to the back burner. A few companies impacted by higher taxes have hiring freeze and are cutting expenses.

The IMF SLA is comforting news and priced in. The economy does not run on the IMF programme alone. The Fund’s presence is necessary to remain afloat, but it means continuation of contractionary policies. Higher taxation, possible currency adjustments and energy prices revision would have inflation implications to be visible from October onwards.

SBP (central bank) may cut the rate by 2-3 percent by then and may take a pause if inflation resurges. The interest rate decline is perhaps going to be much more gradual than anticipated earlier.

In order to meet fiscal targets, the government would have to cut the PSDP (public sector development plan). It’s already down by Rs50 billion for accommodating protected electricity consumers for three months. More cuts may follow. This will limit the growth coming from public investment.

And if there is any revival of the growth spurt, SBP would have to proactively manage it through currency adjustments, as in the absence of foreign investment and market debt, SBP has to keep a balanced current account.

The IMF agreement may provide a temporary lifeline, but it cannot mask the deeper issues plaguing the economy.

With agriculture facing a downturn, urban consumers squeezed by higher taxes, and critical sectors such as manufacturing and services showing only fragile signs of recovery, the forecast is grim.

Sustainable growth requires more than fiscal adjustments and external loans; it demands comprehensive reforms, robust public investment, and policies that stimulate both domestic and foreign investment.

Without these, the economy risks stagnation, leaving the youthful population and future generations to bear the brunt of these economic missteps. The road ahead is perilous, and it is time for the government to adopt a long-term vision beyond the immediate relief of an IMF programme.

Copyright Business Recorder, 2024