For the first time in seven months, inflation fell below 13 percent last month; trade deficit is on a continuous narrowing path on account of the export bonanza led by high cotton and rice prices; while overseas Pakistani remittances are consistently growing. This will keep the current account deficit in check and maintain a comfortable import cover of over six months in foreign reserves.
But that doesn't mean that the economy is out of the shambles, as the mother of all evils, fiscal indiscipline, is shattering investor confidence and worsening the poverty level. The varying economic agenda of different political parties and incompetency of authorities are preventing the implementation of any sort of reforms.
Parties representing urban centres are against taxing more urban dwellers, while keeping the rural segment completely out of the tax net. Their argument is logical as purchasing power of the urban dwellers is being eroded lately owing to subdued growth and high inflation, whereas the spur in commodity prices has resulted in windfall profits to the rural community.
It makes more sense to bring agriculture and allied industries in the tax net and fill the gaps in the existing taxation system, which, according to some estimates, are as high as Rs750 billion. Then the inefficiencies in the public sector entities and the power sector ought to be addressed.
Once the government and tax-collecting authorities start closing the existing loopholes, they can convince the urban parties and the business community on the implementation of RGST. However, to date there is sheer failure of government as regards the enhancing of revenues or the cutting of unnecessary expenditures. And in the meantime, lopsided growth, rising unemployment, and persistent double-digit inflation is worsening the socio-economic strata of the country.
The improvement in external accounts and the sanity in currency market does not seem sustainable unless the fiscal imbalance is tamed. All the talks with IMF are likely to remain inconclusive unless some stern measures are taken to keep the fiscal house in order.
The menace of circular debt, as far as energy is concerned, continues to eat the liquidity of the banking system and interrupt the power supply, with all the efforts of authorities revolving around the arrangement of short-term liquidity to let the system run on edge. But for how long?
The effective dissolution of Pepco and the setting up of an independent and competent board of discos is being persistently delayed. There is no concrete step being taken to reduce generation, transmission and distribution losses, while white elephants like PIA, Railways and Pakistan Steel Mills are eating the taxpayers' money.
The only way out chosen by the government to reduce the revenues and expenditures gap is curtailing development expenditure. But that is not a good option by any means. Poverty alleviation programmes and spending on education and health ought to be the priority for a better Pakistan and for reaping dividends from bulging youth demographics.
MONEY AGGREGATES:
One thing the government is doing right - also a promise to the SBP Governor - is of cutting borrowing from the central bank. It slashed its borrowing toll by Rs257 billion in just 11 weeks to reduce it to Rs72 billion for year to date.
Utilisation of IMF-bridge financed money that was obtained in the last quarter of the previous fiscal year, but remained in buffer stock, could be one reason for less reliance on SBP borrowing. The amount raised from NSS in January - Rs37 billion as compared to an average of Rs14 billion in the past six months - Could be another reason.
The government increased its borrowing from scheduled banks by Rs165 billion in the last eleven weeks. And the release of the coalition support fund helped NFA to increase by Rs75 billion in the same period, facilitating the government to focus less on central bank borrowing
It will be interesting to see how this trend would continue in the coming months in the absence of any material foreign flow.
There's nothing much to talk on the last week, apart from the Rs20 billion decline in government borrowing from banking sources, Rs25 billion fall in currency in circulation and Rs12 billion in private credit.
Overall, the money supply fell by 0.36 percent or Rs21 billion for the week ending February 26.
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KEY MONETARY AGGREGATES AS ON FEB 26
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Rs (mn)
26-Feb 19-Feb Change
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Currency in Circulation 232,132 257,750 (25,618)
Total Demand & Time Deposits 208,112 203,444 4,668
Broad Money (M2) 444,626 465,663 (21,037)
NFA 146,157 146,379 (222)
NDA 298,469 319,285 (20,816)
Net Government Borrowing 233,282 260,104 (26,822)
Borrowing for budgetary support 325,223 344,293 (19,070)
from SBP 71,807 97,025 (25,218)
from scheduled banks 253,416 247,268 6,148
Commodity operation (94,667) (86,891) (7,776)
Credit to non-govt sector 230,573 220,862 9,711
to private sector 208,767 197,068 11,699
to PSEs 21,454 22,993 (1,539)
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Source: SBP.
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