State of the economy

The debate on a charter of economy has resurfaced as the burden on the common man in terms of erosion of the rupee domestically (inflation rate remains at over 12 percent) and internationally (the rupee reached a high of 159 rupees to the dollar this week past - fifteen rupees more expensive than in August 2018 when the Pakistan Tehrik-i-Insaaf government assumed power) is acknowledged by the Prime Minister, Imran Khan prompting him to take mitigating measures including enhanced subsidies for essentials and a pledge to keep utility rates constant.

The Prime Minister's economic team leaders insist that stabilization has been achieved by narrowly defining stabilization as a reduction in the current account deficit - from over 19 billion dollars on August 2018 to 2.153 billion dollars during the first six months of the current year - a no mean achievement; however what continues to be ignored is the cost at which this was achieved - a cost that could have been reduced with a more phased implementation of the crippling though largely necessary International Monetary Fund (IMF) conditions.

Pakistan's trade deficit shrank to 15.7 billion dollars between July-December 2019-20 compared to 21.467 billion dollars in the comparable period of the year before. This remarkable achievement was due to import contraction of 5.1 billion dollars while exports rose by only 553 million dollars in the current year as compared to the year, before prompting the government to focus on percentage rise month on month rather than on the total amount. In marked contrast, the business community cites these statistics to maintain that the decline in imports is largely private sector imports of raw materials and semi-finished products which, in turn, is stifling productivity (large-scale manufacturing sector continues its decline in percentage terms) with a consequent impact on exports. In addition, exporters complain of the high economically unviable cost of borrowing given the discount rate of 13.25 percent, failure to release refunds and tariffs higher than the regional average making their products uncompetitive. Unemployment levels are therefore rising and the national growth rate has plummeted to the lowest in decades projected at 2.4 percent by the IMF in the original agreement as well as in the first review report.

Advisor to the Prime Minister on Finance Dr Hafeez Sheikh substantiated the 2.4 percent projected growth rate in his budget 2019-20 documents based on data that was, two months down the line, acknowledged to be much better than it actually was in terms of the budget deficit (revised upward from 7.2 percent to 8.9 percent). By September last year, no doubt to calm down the Prime Minister's growing concerns, Dr Sheikh began insisting that the growth rate will be higher than the budget's projection. The mid-year review report for the current year, perhaps vetted by Dr Sheikh, is based on a rather irrational claim under the subheading Expenditure Outlook: "on the development expenditure side the unprecedented budget release strategy adopted by the Finance Division this year has provided a lot of fiscal space for utilization of Public Sector Development Programme (PSDP) funds. Accordingly, it is expected that development expenditure will be high resulting in timely completion of approved schemes and projects. This should aid to foster growth and create employment." This claim ignores the fact that the 2.4 percent growth projection was based on the budgeted allocation for PSDP so how can growth 'be fostered' by more than was projected at the time?

This ambiguity in the report's claim is further strengthened under the subheading titled 'Revenue Outlook' which notes that "any shortfall in achievement of these targets in tax revenue collection will have adverse consequences for the projected fiscal position of the government. One of the consequences of falling short on revenue targets would be curtailment in development expenditure." And revenue is indeed falling short of even its revised annual target, projected at 4.9 trillion rupees in the first IMF review.

Economic growth rate, industrial growth, employment levels and a trade imbalance with a very small rise in exports, the most desired source for reducing the current account deficit and shoring up exchange reserves, are widely regarded as components of a well-defined stabilization strategy and sadly they continue to be ignored by the current economic team leaders.

Shortcomings in domestic policies, particularly their pace of implementation as a consequence of the agreement with the IMF aside, Pakistan's economic system has come under considerable pressure due to the double whammy - the pandemic Coronavirus and the oil price slump due to Russia's refusal to agree to production cuts suggested by Saudi Arabia (to take account of the reduction in world demand) with analysts suggesting that the reason is to render the US fracking industry economically unviable. The double whammy has prompted uncertainty in global markets accounting for the withdrawal of "hot" money parked in our short term treasury bills (700 million out of the 3 billion dollars have already left), a factor in the rupee depreciation of last week. And sadly this proves the 'nay-sayers' that included independent economists and former State Bank of Pakistan governors right who had consistently warned that the high discount rate to attract "hot" money to shore up the country's foreign exchange reserves was a flawed policy - an assessment based on overwhelming empirical evidence that hot money can leave one's shores over night.

Power sector and tax collections have performed extremely poorly for decades reflected by the IMF and other multilateral donor conditions during the previous five to ten programme loans. Disturbingly, the PTI administration has done little to improve performance in these two areas of continuing concern. The improved data with respect to the massive reduction in the monthly circular debt flows, from 40 to 12 billion dollars, as claimed by the Power Minister Omer Ayub, has been challenged by the regulator Nepra. And with respect to failure to meet the tax collection target Dr Hafeez Sheikh has reportedly placed the onus on the Federal Board of Revenue though in all fairness the highly unrealistic target agreed by the economic team leaders deserves castigation.

With power arrears rising and tax collections unable to meet the 2019-20 budgeted target (accompanied by an inexplicable rise in the budgeted current and development expenditure of 40 percent each) it is little wonder that the Prime Minister is exhibiting signs of concern. And if one adds to the fact that subsidies (which he recently raised for essentials) were already budgeted to be 6.5 percent higher this year compared to the revised estimates of last year there are concerns about the projected IMF reaction to recent measures announced by the administration.

To conclude, the IMF maybe amenable to renegotiate or perhaps more accurately readjust some of the time-bound action plans/structural benchmarks given the double whammy of the Coronavirus and global recession. However, domestic performance or its lack thereof especially with respect to the power sector and the FBR is likely to come under discussion during the third review expected before the budget 2020-21 and the next budget may well be even more stifling - both for the productive sectors and private households - than the current year.