Taking a break from our series on Short- and medium-term economic challenges, we reflect on the new information released for the month of July and a critical data relating to last completed fiscal year. These information clearly point to the fact that the economy is heading for a hard road ahead.
The year-on-year (YOY) inflation number for July (compared to July last year) was recorded at 5.8 percent, the highest since October 2014. The price stability the country enjoyed for nearly four years, seems to be ending. All price indices show a sharp surge in inflation. The trend is visible from March 2018, when this inflation was 3.2 percent and since then it has increased uninterruptedly to its present level. Since July is the first month of the fiscal year, the average inflation is also 5.8 percent, and with rising trend the average inflation during the year is bound to increase. Core inflation, sensitive price indicators and wholesale price index have also depicted similar trends.
This is not a surprising outcome, both for reasons that are exogenous as well as related to policy.
First, the international crude oil prices have risen by more than 60 percent since last July. From $48/bbl on 1st July 2017, Brent rose to nearly $80/bbl before sliding back to slightly above $76/bbl in more recent days. Analysts are apprehending further surge in prices as the Iran sanctions date of November approaches.
Second, the depreciation in the exchange rate has yet to bring about its full impact on prices. From July 2017, when rate was Rs.104.8/$, to mid-July 2018, the rate has depreciated to an astounding Rs.128.50/$, or about 23 percent. The price increase coupled with depreciation effect would have a highly negative effect on domestic prices. There would be secondary rounds as the higher prices are fully adjusted in the prices of other commodities.
Third, we must distinguish between the international oil price, which is exogenous, and the depreciation of exchange rate, which was the executive decision. The latter has to be attributed - even though not fully justified as last two rounds of depreciations could have been avoided - to the high aggregate demand, which is fueled primarily by the unbridled fiscal deficit last year. As we show later, the fiscal indiscipline last year was unprecedented in the recent past. Consequently, the balance of payments deficit has shot up to nearly 6 percent of GDP or $18 billion, highest in more than a decade. The growth in broad money was counteracted by the decline in net foreign assets due to loss of reserves. Despite that, both the reserves money (M1) and broad money (M2) saw a double-digit growth and one can foresee lagged effects on inflation going forward.
Fourth, and perhaps this would be most problematic, there is a huge amount of price adjustment that is due for a long time but has been postponed on one pretext or the other. The key prices requiring adjustment are electricity and natural gas. For electricity, the current tariff applicable is for 2015-16 and two years have since passed. With rising fuel prices, increase in tariff would be inevitable. Regarding natural gas, the previous Government did not adjust it for full five years, even when, under law, this is a straight forward exercise. This was partly justified when oil prices were decreasing but this justification was over-used. Ogra has determined gas price tariff that implies an average increase of 46 percent. More worrying is the adjustment required for the domestic consumers, where an increase of 300 percent is determined. The bill of the average consumer paying a monthly cost of Rs 450 would rise to Rs 1350. This would be quite burdensome. In the meanwhile, huge arrears have accrued for both gas supply companies due to delayed adjustment. Without the price adjustment, the two companies would be facing a loss of about Rs 127 billion during the year. Additionally, a sum of Rs 300 billion, nearly 1 percent of GDP, has been determined on account of prior years' price adjustments which were not allowed. Ogra has asked utilities to recover this amount in installments. This would be an added charge beyond the increased price.
On the external account two news items are noticeable. First, the increase of 25 percent in remittances compared to July 2017 was remarkable. However, whether this is the result of the victory of a populist party in the election or the normal effect of Eid falling due in July. The month of August would determine how the expatriates community responds to Government's call. Second, the FDI for July was flat. This is going to be the key to mobilize investment and foreign exchange resources. Government should soon lay out an investment policy and appoint a competent person to lead the investment drive including removal of irritants inhibiting businesses and increasing the cost of compliance.
The most significant data released last week is for the fiscal operations for 2017-18. The fiscal deficit is reported at 6.6 percent, which is significantly higher than 4.1 percent announced in the original budget and 5.5 percent claimed in the revised estimates at the time of budget for 2018-19. The tax receipts are shown at Rs 3842 billion, which is inclusive of taxes paid under the amnesty scheme. It is, however, not clear whether only the receipts under the original deadline of up to 30-6-2018 were included or those received during the extended period are also included. If we limit to the original deadline, the receipts under the scheme were reported at Rs.92 billion. Excluding those, the tax receipts were Rs.3750 billion, which is 9 percent of GDP. This is slightly better than the growth of 8 percent during 2016-17. It is indicative of a real crisis in resource mobilization in the country. The original target was Rs.4013 billion, which was revised to Rs.3935 billion in April 2018 while presenting the next year budget. It is evident that the revenue performance has left much to be desired. The new government faces a huge task of overhauling tax machinery to generate the necessary resources for running the affairs of the government and achieving its development agenda.
An equally dismal picture emerges on the non-tax revenues side. The original target was Rs 980 billion, which was revised to Rs 845 billion in April 2018. The actual receipts are Rs 630 billion, a shortfall of Rs 215 billion relative to revised estimates and Rs 350 billion relative to original estimates. The receipts that have hit hardest included Gas Infrastructure Development Cess (GIDC) and Coalition Support Fund (CSF), which were budgeted at Rs 250 billion but combined receipts were no more than Rs 37 billion. This is also a matter of great concern and needs immediate attention of the government.
The developments we have noted largely reinforce what we have been saying in these pages for quite some time. We have all the good wishes and prayers for the new managers and we sympathize with them on the poor state of economy they have inherited. But it's their problem. The time is running fast and the nation is anxiously waiting for the new plans to reverse the declining trends in the economy.
(The writer is former finance secretary)
[email protected]
Comments
Comments are closed.