EDITORIAL: The December 2024 Economic Update and Outlook, a monthly publication uploaded on the Finance Division website, began its analysis on an extremely positive note: “macroeconomic fundamentals have strengthened, marked by a further deceleration in Consumer Price Index (CPI) inflation with stable food prices, effective fiscal consolidation resulting in fiscal surplus, a current account surplus supported by increased exports and remittances, and an accommodative monetary policy.”
This assessment encapsulates the outer husk of the country’s economy and, disturbingly, fails to take account of the germinating process within the pod on all four positive counts.
There has been a deceleration in Sensitive Price Index, though it increased by 0.8 percent in the week ending December 26 against the previous week registering a major increase in the price of tomato (20.75 percent), sugar (2.19 percent) and vegetable ghee (1.17 percent); however, with private sector labour (constituting 93 percent of the country’s work force) subjected to wages remaining largely stagnant for the fourth year in a row the feel-good factor is simply not possible.
It is therefore not a matter of the current government’s inability to convince the general public that they are better off than they were earlier this year but the fact that the rate of inflation, albeit lower than before, continues to imply a sustained erosion of the purchasing power of each rupee they earn.
The claim of effective fiscal consolidation is easily challenged with the inability of the Federal Board of Revenue to meet the targets agreed with the International Monetary Fund with a 350 billion rupee shortfall envisaged during the first half of the current fiscal year leading to the issuance of a proliferation of notices accompanied by periodic threats that tax evaders will be summarily dealt with.
While supporting these efforts the fact remains that unless the Competition Commission of Pakistan is fully empowered to deal with registered associations that are prevalent in most large-scale manufacturing sectors/subsectors who routinely collude to control supply in return for fiscal and monetary incentives fiscal consolidation will remain a challenge.
In addition, the federal finance minister recently referred to the 190,000 evaders and pledged that they will no longer be allowed to bypass the country’s tax authorities; however, he must surely be aware of the fact that many industrial units have already relocated in other countries as our tariffs (a major input cost) are the highest in the region as is our policy rate of 13 percent though granted that it has become more accommodative since earlier this year when it was a high of 22 percent.
Fiscal surplus as claimed in the Update is unlikely to remain by the end of the year with the budget documents projecting a deficit of 5.9 percent – lower than the 7.4 percent realised last fiscal year. And the current account surplus is supported almost entirely by remittances, which rose by nearly 34 percent July-November this year compared to the same period the year before as exports rose by 919 million dollars while imports rose by 1770 million dollars.
Perhaps the singular most surprising improvement was in credit to the private sector – from 141.3 billion rupees (1 July-15 December 2023) to 1470 billion rupees (1 July- 13 December 2024) with LSM still registering in the negative - 0.64 percent July-October this year.
It is relevant to note that 1 July to 25 October this year credit to the private sector was 447.1 billion rupees hence the massive rise, over a trillion rupees in credit, took place between 15 October to 15 December and given that this massive rise reduced the negativity of LSM from 0.76 percent to 0.64 percent one can credibly argue that this rise was channeled into the stock market and not into higher output.
While a buoyant stock market has been used by our economic managers as an indicator of growth and prosperity due to their policies yet unless it is backed by a rise in output and a rise in employment opportunities, both indicators remaining stagnant, this claim too does not have a feel-good factor.
To conclude, there is persistent rhetorical support for critical structural reforms in the tax sector, the power sector and in the state-owned entities, however, there is as yet nothing substantive in terms of an outcome for example the applicable tariffs continue to rise though the public is told the rise would have been higher had some agreements with the Independent Power Producers not been reached, the tax collection is much improved though the target set has not been achieved and the SOEs’ loss-making potential is a staggering 5.9 trillion rupees since 2014.
Copyright Business Recorder, 2025
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