This is the second of a two-part series focusing on the contribution to dealing with the ongoing economic impasse, if any, of policies currently being implemented.
These can be differentiated between those that are critical conditions under the ongoing Stand-By Arrangement (SBA) of the International Monetary Fund (IMF) and those that are pro-growth as envisioned by the Special Investment Facility Council (SIFC) – a body represented by senior military and civilian personnel as well as members of the federal and provincial executives to ensure smooth synchronicity between policy decisions and their implementation.
There is little doubt that the ongoing severely contractionary policies under the ongoing SBA are anti-growth and yet the Fund projected a growth of 2.5 percent for the current year. The low base last fiscal year of negative 0.5 percent may well be one reason for projecting this rate.
The following four critical SBA conditions are anti-growth. First, the most obvious are the administrative measures with respect to raising gas and electricity charges, to meet the economically viable objective of full cost recovery and thereby stifle the flow and phase-wise reduce the stock of circular debt which currently stands at over 2.6 trillion rupees – an amount that places an inordinately heavy pressure on the country’s fragile economy.
The circular debt is the outcome of flawed policy decisions by previous administrations agreeing to contractual obligations (release of foreign exchange for fuel imports, capacity charges payable in dollars and 100 percent repatriation of profits) to Independent Power Producers including those operating under the umbrella of the China Pakistan Economic Corridor (CPEC).
Control of power theft/high receivables implemented through load-shedding on feeders where receivables were higher than stipulated is the only proactive policy supported by subsequent Pakistani administrations for the past two decades. Over time there were reports of unsuccessful attempts at disconnection when dealing with powerful pressure groups/individuals. The recent crackdown, from 7 September onwards, has been more effective with 50 billion rupees of pending receivables cleared to-date, a significant amount though not in comparison to the 2.6 trillion-rupees circular debt.
A rise in tariffs raises the cost of doing business as it is a key component of most productive units and is cited as the reason for the 5 percent decline in exports July-September 2023 against the comparable period of the year before. The Large Scale Manufacturing (LSM) sector has witnessed a positive 0.5 percent growth July-August this year against negative 1.2 percent in the comparable period of the year before yet there is evidence to suggest that it was the low base last fiscal year (negative 10.3 percent) that accounts for a rise this year. In addition, there has been an uptick in farm output due to the enriched soil after the floods last year which is a major input for the LSM.
Second, the rise in Federal Board of Revenue (FBR) collections by 25 percent in the first quarter of this year compared to the first quarter of last year is due to massive rise in taxes budgeted for the current year. Disturbingly, these collections are largely from indirect taxes, whose incidence on the poor is greater than on the rich. In addition, the rise in non-tax revenue by 114.7 percent in the first quarter of this year compared to the same period last year is mainly sourced to the petroleum levy which is in the sales tax mode. Thus this rise in non-tax collection maybe accompanied by a significant decline in domestic demand which in turn may impact on the recent uptick in LSM output which as per Monetary Policy Statement dated 30 October 2023 “has indicated a gradual improvement in the first two months of this year, with major contribution coming from domestic-oriented sector.”
Thirdly, the discount rate is at 22 percent which impacts negatively on credit to the private sector which declined from negative 94.3 percent 1 July to 7 October 2022 to negative 291.1 percent in the comparable period of this year. The massive increase in government borrowing from the domestic banking sector also crowded out private sector borrowing.
And finally, the market-based exchange rate with the recent crackdown on the speculators leading domestic economists to express concerns that the continuous fall of the dollar versus the rupee since 7 September may well be focused on the desired objective to reduce imported inflation. The rupee has weakened against the dollar during the last ten days – perhaps more than a coincidence as the IMF team arrived on 3 November for scheduled talks on the SBA first review.
There is no doubt that if the SIFC is successful in luring foreign investors into the country, reportedly around 25 billion dollars has already been pledged for this year and up to 100 billion dollars in the medium term, growth will not only exceed the budgeted target but far outpace other countries in the region. One would hope that the inflow of direct investment would not be for contracts that maybe to the detriment of the general public, as has been the case with the IPPs (independent power producers).
To get a realistic assessment of foreign direct foreign investment inflows it is relevant to note that the accumulated stock of foreign direct investment by 2022 (in million dollars) was as follows: the United States 10,461,684, China 3,822,449, the UK 2,698,563, the Netherlands 2,683,600, Singapore 2,368,396, Hong Kong 3,099,558 and India a late entrant in the market 510,719. All these countries provide a secure macroeconomic environment, political stability and implement policies that lure foreign investors.
Pakistan in contrast is on an IMF programme as the country suffers from a serious balance of payments problem, is in the throes of a severe economic impasse that is impeding an upgrade in our rating that, in turn, is compromising the capacity to borrow from the commercial banking sector abroad or engage in the debt equity market through issuance of Sukuk/Eurobonds.
Pledges of foreign direct investment aside Pakistan must first put its house in order which would require ideally voluntary sacrifices by the recipients of current expenditure and desist from extending fiscal and monetary incentives to the influential in the private sector – industrialists, wealthy exporters, builders, rich landlords, traders, wholesalers, aarthis. The ongoing crackdowns are in the right direction but their scope must be widened.
(Concluded)
Copyright Business Recorder, 2023