Mixed signals on the economy

The first quarter of 2024-25 is going to come to an end shortly. During these three months, there have been a number of developments on the economic front, some positive and others negative.

The first major positive development is progress on the IMF front. It started with an IMF staff level agreement on economic policies with Pakistan for a 37-month Extended Fund Facility of $7 billion on July 12, 2024.

There was initially some apprehension that given the special efforts required to meet the external financing requirements, there might be a big delay in the IMF Executive Board meeting to approve the EFF for Pakistan. However, the meeting has now been fixed for the 25th of September.

We look forward to the official staff statement after the Board approval. This will indicate the three-year macroeconomic targets and the magnitude of external financing requirements up to 2026-27. Very importantly, the extent of toughness of the performance criteria and the structural benchmarks will need to be assessed.

Turning now to the indications for growth and the level of investment in 2024-25, the country had already witnessed one of the lowest levels of investment in 2023-24, at 11.4 %% of the GDP, in the history of Pakistan.

The SBP statistics on monetary trends reveal that in the first two months of 2024-25 there has continued to be a decline of almost 3% in bank credit to the private sector. This may perhaps improve somewhat following the recent sizeable reduction in the policy rate by the SBP.

There is need to highlight an unbelievable trend. The PBS time series data on sectoral investment by the private sector from 1999-2000 to 2023-24, at constant prices of 2015-16, reveals that private investment in industry was even lower in 2023-24 than the level in 1999-2000.

Perceptions about profitability of investments have changed fundamentally in Pakistan. Now, the level of private investment in real estate is 150% more than that in industry. We have effectively said good-bye to a strategy of export-led growth.

Industry today carries a tax burden which is over five times that of the rest of the economy. Coupled with the exponential jump in electricity and gas tariffs, industrial profitability is probably at its lowest level and is failing to attract new investment. This has had a very adverse impact on the level of industrial production. The first month of 2024-25 has seen only a 2.4% rise in relation to July 2023, but a fall of 2% compared to June 2024.

There is also the likelihood of a ‘high base’ effect on the growth rate of the agricultural sector in 2024-25. In 2023-24, the major crop sub-sector achieved a spectacular growth rate of 16.8%, and growth rate of the sector was 6.5%. There are indications already of a smaller cotton crop.

Also, the next wheat crop may be affected by the current 30% fall in wheat price due to too much import in 2023-24. Overall, the GDP target growth rate of 3.5% in 2024-25 may not be achieved.

There has been fortunately a quantum drop in the rate of inflation. It was as high as 28.3% on a year-to-year basis in January 2024. By August it had declined to 9.6%. The primary reason is the extraordinary fall in the rate of inflation in food prices from 26% to less than 3% during this period.

There is the likelihood of a return to double-digit inflation in coming months. The commencement of the IMF Programme may necessitate big tax enhancements to cover the large and growing shortfall in FBR revenues.

Also, there will continue to be the need for periodic adjustments in electricity tariffs. If Pakistan has to move to a market-based exchange rate policy then there will also be a semblance of imported inflation. Fortunately, the crude oil price has fallen to near $70 per barrel. However, there will be need to raise the petroleum levy.

Turning to the two deficits, we look first at the budgetary situation. Already, the Ministry of Finance has reduced the expected level of SBP profits in 2024-25 by Rs1250 billion. The target for the combined provincial cash surplus was set at Rs1250 billion.

However, the provincial budgets presented reveal that it is unlikely to be more than Rs700 billion. There is also the growing shortfall in FBR revenues. However, the fall in the policy rate should provide a modicum of relief on the debt servicing front. Overall, the original consolidated budget deficit target of almost 6% of the GDP in 2024-25 is likely to be significantly exceeded by 1.5% to 2% of the GDP.

The last set of mixed signs is observable in the balance of payments. During July, there has been a relatively small current account deficit of $162 million. The primary reason for this is the extraordinary growth in home remittances of over 47%. This has been sustained in August.

Exports have also demonstrated some buoyancy, with a growth rate of 14% in the first two months of 2024-25. This is significantly higher than the growth rate of imports of under 6%. Consequently, there has been some narrowing of the trade deficit in goods.

The area of concern in the balance of payments is with the financial account. It showed a marginal surplus of $268 million in July, as compared to $3.266 billion in July 2023.

The primary reason for this was the much larger disbursement of funds in July 2023 into the general government account. The fall is clearly due to the uncertainty of a new IMF programme.

However, there is need to recognize that the nine-month Stand-by facility of the IMF up to July 2024 was successful in substantially enhancing the foreign exchange reserves from a critically low level of $4 billion to over $9 billion.

Overall, the economy is showing both positive and negative trends in different indicators. Hopefully, Pakistan will see much less ‘stagflation’ in 2024-25. Efforts will need to be made to adhere to the IMF Programme and thereby reduce the level of risk and uncertainty.

However, this will require a much stronger commitment and performance then was shown in the last Extended Fund Facility.

Copyright Business Recorder, 2024