On economic direction

In the midst of a harsh winter, there is optimism in the government’s economic team over the country’s economic direction. Reports from the meet-up last week of the Monetary and Fiscal Policies Coordination Board suggest that there was no argument over “economic recovery” having taken place. Only that the Finance Ministry and the SBP seem a bit eager to take credit for their own efforts. So, it wasn't really a call for a serious review of downside risks amid and post-Covid for the economy. Save for the Planning Commission, which has questioned the effectiveness of current monetary stance in these times.

Also released last week was the Finance Ministry’s monthly economic outlook (December). The report’s authors(s) feel confident that the so-called economic recovery would be “keeping its momentum”. The optimism is based on recent growth in November exports (yearly exports in Jul-Nov period are down 7% per SBP and up 2% per PBS), the rebound in LSM, the continuing rise of remittances and falling trend in inflation (SPI) in recent weeks. The ministry expects a “strong indication of economic revival” in coming months, despite impact of coronavirus restrictions on services sectors and weather-related disruptions.

The report doesn’t go into much details on how exactly this wave of Covid-19 will impact the economy, nor does it provide an updated forecast for GDP growth for FY21. While it recognizes the Covid-19 resurgence as a spoiler to economic recovery, it continues to tap the one-time economic relief package announced in March as evidence of government’s efforts to reduce the Covid-19 crisis’ impact on the people and the economy. There is silence on whether a fresh round of relief is in order.

On the fiscal side, the marginal growth of 4 percent in FBR tax collection has been attributed to “comprehensive tax measures and administrative reforms”. This conveniently ignores the fact that the inflation is in the range of 8-9 percent, so the taxman may well have under-performed. But given the economic weaknesses, any growth is welcome, albeit it is not enough to meet the Rs5 trillion target. (The lofty target is deemed unrealistic by some other stakeholders, so efforts are on to find new sources).

Meanwhile, higher spending under PSDP in the ongoing fiscal is visible due to low PSDP budget, but the report’s author(s) think that it “bodes well for achieving sustainable economic growth in the post COVID scenario”. Overall, the expectation of favorable agricultural output, especially in sugarcane and rice crops, government’s Covid relief measures, and higher development spending, are seen as backstops to GDP growth.

In the external sector, there is no word on “how” remittances have fared so well so far. Still, there is a prediction that “Remittance inflows, keeping its trend seen in previous months, will remain at a high level and are expected to compensate for the trade balance deficit in the first half of the current FY”. One had hoped the FinMin would have a better explanation of remittance growth. Meanwhile, there is no critical evaluation of exports going forward, even as Commerce Ministry hypes up latest numbers.

The report is silent on the elephant in the room – the stalled IMF loan programme. The second review is stuck as the government is unable to satisfy Fund on issues of electricity tariff, tax measures, etc. The finance minister had previously sounded optimistic about a visit of Fund staff – but Covid-19 makes routine deliberations challenging. But the minister is known to be good at closing deals. A partial tariff increase in near future, along with high-level commitment to raise taxes in summer may get the Fund going.