The immediate need is to bring in foreign exchange in terms of cheap loans (mainly IMF) and issue Diaspora bonds to replace expensive short term borrowing and jack up the reserves to improve import cover. And the next is to curb current account deficit to bring stability and that requires cutting fiscal deficit.
The question is how much CAD can be curbed and for that the need is to evaluate what factors had attributed to the hike of it. The CAD was a mere $4.9 billion (1.7% of GDP) in FY16 which jumped to a whopping to $16.4 billion (5.8% of GDP) in FY18. An increment of $13.1 billion per annum in two years is mainly due to increase in goods and services imports by $16.4 billion, marginally offset by $2.8 billion hike in exports.
The need is to work on a strategy to lower the abnormal increase in imports in the past two years. Out of $16.4 billion hike, around one third ($5.7 bn) is energy; one tenth ($1.8bn) is services imports while the bulk of the increase is due to non-energy goods imports ($8.9 bn).
Even within energy imports, the higher consumption is one the factor attributing to higher imports. The energy import bill in FY18 is virtually the same as it was in FY13; but prices back then, on average, were 35-40 percent premium to FY18 prices. The culprit is energy consumption which jumped by 28 percent between FY13-18.
The story of high imports culminates to today’s consumption or on economic expansion for tomorrow’s consumption. The non energy imports increased by 57 percent from $26.5 billion in FY13 to $41.6 billion in FY18. The economic expansion without bringing competitiveness to exporting sector has led to the crisis.
Consumption is driven primarily by the fiscal expansion, large scale CPEC projects, overvalued currency and easy monetary policy. The need is to reverse all these factors to reduce the CAD in coming years. The currency has already adjusted by 20 percent to bring REER close to equilibrium, the policy rate has been increased by 150 bps in the last six months and some further tightening is warranted in months to come. And due to political uncertainty, the CPEC projects are on halt too.
The challenge is to correct the fiscal imbalances which deem to be the biggest contributor in widening of current account deficit. The fiscal deficit has reached 7 percent of GDP or Rs2.4 trillion in FY18; and there is not much space and the federal government has to curb significantly, as after 7th NFC award the federal role in fiscal framework has weakened substantially.
To add to the ado, the PMLN government in its last budget gave generous relief in income tax which will make the job of the incoming government more difficult. The federal government is left with virtually no revenues to spend after meeting debt, pension and defence related obligations. Only space the federal government will have is to significantly cut the development expenditures and to do away with remaining subsidies.
The biggest challenge is to curb the energy related subsidies which requires unpopular decisions of jacking up power and gas tariffs. The new power plants are coming up with cost of additional capacity payments irrespective of energy consumption. And rising international oil prices are making the situation more difficult.
It’s a huge responsibility on PTI economic managers as they need to curb the fiscal deficit to correct external imbalances and at the same time the need is to bring competitiveness in manufacturing sectors to boost exports. One needs higher energy prices and additional taxation measures, while the latter’s demands the exact opposite. Tough luck!
Comments
Comments are closed.