EDITORIAL: Minister of Finance Muhammad Aurangzeb while addressing the eighth edition of the “Future Summit” organised by Unity Foods and Nutshell Conferences Group once again cited the declining inflation rate indicative of an economy on the mend and as an achievement of the ongoing economic policies.
He proceeded to note that Pakistan’s credit rating has improved, but did not mention that the improvement has retained Pakistan in the high risk of default category, which implies that the cost of borrowing from abroad is not likely to be favourable — a prime objective of the government heavily reliant on foreign borrowing to meet its debt obligations as well as for budget support.
In addition, the decline in the discount rate will increase credit to the private sector, or so contended the Finance Minister; however, this linkage has so far not been evident in spite of the fact that the discount rate was reduced from a high of 22 percent in April 2023 to 15 percent as of 4 November 2024.
Data released by the Finance Division suggests credit to the private sector was negative 247.8 billion rupees (1 July to 13 October 2023) while between 1 July and 11 October 2024 credit to the private sector was negative 240.9 billion rupees.
This is not a sign of a booming economy as claimed by the Finance Minister and with the curtailment of the federal public sector development programme (a prime mover of growth, given that a recent rise in consumption is being accommodated through a decline in inventories rather than a rise in output) a usual practice as and when the budget deficit becomes unsustainable, which is being dealt with by increased borrowing, as well as the rising possibility of the activation of the contingency plan, envisaging higher indirect taxes to meet the rising shortfall in collections, growth maybe further curtailed.
There is a growing deviation between the 3.5 percent budgeted growth projections and those being given by international lending agencies — the World Bank projected it at 2.8 percent earlier this year and the International Monetary Fund has projected it at 2.4 percent — while the State Bank of Pakistan in its recent Statement gave a range of 2.5 to 3.5 percent.
It is important to note that current account deficit too has shown an improvement but what must be realised is that the trade deficit has narrowed because of continued delays in opening of letters of credit, which the government has pledged to the Fund it will stop, and the reopening of the taps of borrowed inflows subsequent to the approval of the ongoing 7 billion dollars Extended Fund Facility.
Muhammad Aurangzeb also mentioned the decline in inflation to 7.2 percent in October (up from September’s 6.9 percent) from a high of 28.3 percent in January this year — a decline that is overstated as the Pakistan Bureau of Statistics is factoring in subsidised prices applicable only in Utility Stores where availability of a product is not ensured, as well as understated rent — there is little if any feel-good factor amongst the general public because the October rise in prices is over and above a very high base.
Further, given that wages in the private sector have not increased though the government has raised salaries by upwards of between 20 to 25 percent payable at the taxpayers’ expense and constituting a mere 7 percent of the total labour force.
It is relevant to note that in all the 23 previous IMF programmes this outcome was achieved within the year and yet the country went back into its boom-bust cycle due to what the IMF in its staff-level agreement on the ongoing loan stated, “structural fiscal policy weaknesses and repeated boom-bust cycles (that) have increased external financing needs and depleted buffers, leaving a narrow path to fiscal and external sustainability.”
The Minister did list a litany of sectors that needed fixing, notably taxes, energy, finances, and pensions — sectors that have required reforms for several decades which, he rightly, blamed on his predecessors. However, what is concerning is that eight months since the cabinet was announced there has been little movement towards dealing proactively with any of these sectors though the relevant ministers and advisors (many who failed to reform the sectors in the past) constantly talk of good news that is imminent.
It is time that a comprehensive in-house strategy be developed for these sectors and instead of focusing on publicising an intent to reform like in previous administrations actual reforms begin to be implemented as their blueprints are available though they continue to gather dust in the relevant ministries.
Copyright Business Recorder, 2024