EDITORIAL: Pakistan’s economy, as per the Monthly Economic Update and Outlook January 2022 by the Economic Adviser’s Wing, not surprisingly echoed the sentiments of Finance Minister Shaukat Tarin and Prime Minister Imran Khan notably that it “continues to show healthy value-added creation, its cyclical position is largely balanced and the trend growth rate of potential output remains strong;” while risks were largely external to policy planning, including “the spread of Omicron variant, inflationary and external pressures due to rebounding of global commodity prices.”
There is no mention of the contribution of the rupee depreciation to inflation with the State Bank of Pakistan (SBP) website noting that the real effective exchange rate worsened in December over the month before — from 98.5 in November to 96.7 in December 2021. Rupee depreciation has responded only mildly to the “two-month open market operations by SBP” as noted in the Monetary Policy Statement dated 24 January 2022, claim of healthy reserves in the MPS dated 14 December 2021 backed by the Update citing the reserves held by SBP rising from 13 billion dollars on 22 January 2021 to 16 billion dollars on 24 January 2022 and of course the government’s pledge to meet all International Monetary Fund (IMF) sixth review prior conditions.
The Update however does mention that appropriate policies, i.e., massive vaccination drive, effective monitoring of markets (though impact of inflation on the lower economic strata is targeted to be mitigated through issuance of cards (Benazir Income Support Programme/Sehat Sahulat Card/free credit cards to farmers and SMEs/fuel cards/ration cards which would up the government expenditure which perhaps accounts for higher not lower inflation projections in the current year) and prudent measures to curtail non-essential imports are under way to offset the risks and challenges being faced by the economy. It is, however, heartening to note that remittances continued to show an upward trend — from 14.2 billion dollars in July-December 2020 to 15.8 billion dollars in the comparable period of 2021 — the only statistic that continued to provide relief to the hapless economy.
The government is citing the 5.37 percent growth rate for last fiscal year as a positive which maybe premised on higher sales after the lockdown was lifted, a global phenomenon, and largely absorbed by inventories rather than higher output. What should be of serious concern to the government is the contention noted in the 24 January MPS that “growth rates of several high-frequency demand indicators either stabilised or slowed, including cement dispatches and sales of petroleum and products, tractors and commercial vehicles.”
As per the SBP Governor in his interview to Bloomberg, the growth rate projected for the current year is in the range of 4.5 percent instead of the over 5 percent being projected by the government.
This is backed by higher input costs, partly due to administered prices of utilities agreed with the IMF, partly due to higher taxes levied on utilities in an attempt to achieve full cost recovery, partly due to the rise in petroleum levy by 4 rupees per month (till the upper limit of 30 rupees per litre is reached) pledged to the Fund and partly due to the supplementary finance bill passed during the last days of 2021 calendar year which the MPS notes will lead to fiscal consolidation “with a faster and more pronounced impact on demand” while the government maintains that as most of the exemptions withdrawn will be refunded there will be a minimal impact on inflation.
In other words, there is a growing need for rationalization of analysis between the SBP and the Finance Ministry.
A number of macroeconomic data shared in the Update should be a source of worry for the Ministry: (i) exports rose from 11.8 billion dollars July-December 2020-21 to 15.2 billion dollars in the comparable period of 2022, however, this rise is attributed to the rise in the prices of our major exports in the West sourced entirely to supply chain disruptions due to Covid-19; while imports rose from 23.2 billion dollars July-December 2021 to 36.3 billion dollars in the comparable period of 2022 — a major contributor to the rise in current account deficit from negative 1.2 billion dollars to over 9.1 billion dollars in the current year.
This data makes one wonder when the prudent measures to curtail non-essential imports as claimed in the Update would begin to show results; (ii) fiscal deficit rose from 822 billion rupees in July-November 2021 to 951 billion rupees in the comparable period of 2022.
Thus the 32 percent rise in tax revenue — from 2,204 billion rupees July-November 2020-21 to 2,920 billion rupees in the comparable period of 2021-22 — did not lower the fiscal deficit as projected in the MPS though this may occur subsequent to the implementation of the Supplementary finance bill; (iii) credit to private sector rose dramatically — from 215.5 billion rupees July 2020 to 8 January 2021 to 772.8 billion rupees in the comparable period of 2021-22 — a rise that as per the MPS was driven by increased demand for working capital, however, Large Scale Manufacturing (LSM) July-November 2020 rose by 6.9 percent while it rose only by 3.3 percent in the same period of 2021 though perhaps more worrisome is the fact that while LSM rose by 14 percent in November 2020 it rose by 0.3 percent in November 2021; and (iv) while the much cited incorporation of companies rose by 4.67 percent — from 12,208 July-December 2020 to 12,778 in the same period of 2021 yet market capitalization declined by 17.93 percent in dollar terms (8 percent in rupee terms) and the PSX index declined by 6 percent.
Public Sector Development Programme’s authorisations (not commensurate with actual disbursements) increased from 299.7 billion rupees in July-November 2020 to 434.6 billion rupees in the same period of 2021, and while the Update focuses on external risks, including the spread of Omicron, yet one would hope that the government begins to focus on curtailing its expenditure as a means to not only reduce the need to raise taxes and/or sell the family silver at throwaway prices but also to reduce its rising dependence on domestic borrowing (from 16.5 trillion rupees in August 2018 to over 27 trillion rupees today) and foreign borrowing (from 95.5 billion dollars in 2018 to over 130 billion dollars today).
Moody’s Investors Services has rightly warned Pakistan that it may have to balance fiscal consolidation objectives with rising social demands to ameliorate structural problems including weak governance. The time is at hand to undertake massive sacrifices by all recipients of current expenditure, implement structural reforms, particularly in the power and taxation sectors, instead of following past precedence of raising utilities rates/taxes; and last but not least, improve governance.
Copyright Business Recorder, 2022