The bad news on the economy does not seem to end. Anything that can go wrong is going wrong. The previous article had identified six areas where economic trends had deteriorated in recent weeks and months. More problem areas are pointed out in this article.
The first area of focus is the balance of payments. Along with the burgeoning trade deficit, the month of May 2018 saw a fall in remittances of over 5%. This was the month of Ramazan and transfers to families are usually higher in preparation for Eid. However, remittances fell sharply from Saudi Arabia and the United Arab Emirates by 16% and 13%, respectively. One factor which may have contributed to this was the large gap of over Rs 3 per dollar between the open market and the inter-bank exchange rate.
Recently released data by the PBS for the month of April 2018 of the Quantum Index of Manufacturing (QIM), reveals that the monthly growth rate was relatively low at 4%. Combined together, the growth rate in March and April 2018 is only 3%. This is in sharp contrast to the growth rate of over 6% observed from July 2017 to February 2018. Industries which are beginning to lose buoyancy, include pharmaceuticals, iron and steel products, engineering goods, electronics, chemicals, fertilizer and leather products.
There has also been a, more or less, unanticipated devaluation of the rupee in the last few days. The inter-bank rate of the currency now stands at just over Rs 120 per dollar. The three moves, each of 4 to 5%, since December 2017 are clearly a reflection of the plummeting of foreign exchange reserves. The problem is that periodic relatively small moves promote speculative behaviour. A better strategy may have been to make one big move. The next few weeks will indicate whether the expectation is of further devaluation. A good indicator will be if the upsurge in imports continues rather than slows down.
An extremely worrying development is the widening of the fiscal deficit. Based on application of the 'below the line' approach of estimation of the total financing of the budget deficit is appears that the magnitude had already exceeded Rs 2200 billion by the end of May 2018. The deficit has approached 6.4% of the GDP in 2017-18, with one month remaining. The caretaker Finance Minister has indicated that she expects the full year deficit to be 6.1% of the GDP. Apparently, this has already been exceeded. In particular, the Provincial Governments were expected to generate a sizeable cash surplus of Rs 347 billion in 2017-18. The actual position is of a near zero cash surplus of only Rs 3 billion as of 1st June 2018.
Foreign direct investment had shown some growth in the first nine months of almost 5%. However, in April 2018 there has actually been a big fall of 20%. Also, there are two observable trends in FDI in 2017-18. First, the inflow from China has demonstrated a phenomenal increase of 51%. However, FDI from the rest of the world has fallen sharply by 34%; despite the improvement in the security situation and supply of electricity. Second, investment, mostly by China, in the power sector has increased by 46%, while it has fallen by 11% in the rest of the economy.
There are also some unusual developments in money supply. During 2016-17 the increase in bank deposits had been more than twice the rise in currency in circulation. However, the difference has come down to only 14% by 1st June 2018 in 2017-18. Clearly, a signal is being conveyed that nominal interest rates are too low in the face of rising expectations about the rate of inflation.
In fact, the Sensitive Price Index (SPI) has perked up somewhat recently. During the second week of June, it registered an increase of 3.6% on a year-to-year basis. Earlier it had been operating at less than 2%. The rise in rate of inflation, as measured by the SPI, is attributable to high double-digit escalation in prices of chicken, tomatoes, onions, petroleum products, beef and mutton. Perhaps some of the increase is seasonal in character due to the month of Ramadan. But there is no doubt that the rate of inflation is now on an upward trajectory due to devaluation of the Rupee and rising oil prices.
There has also been an unprecedented jump in the level of public debt in 2017-18. The public debt to GDP ratio reached the peak level of 70% by end-March 2018. This represents an increase of 4.7 percentage points over the ratio in March 2017. Believe it or not, this increase is almost exactly the same as the rise in the public debt to GDP ratio over the four-year period, March 2013 to March 2017, of 4.8 percentage points.
The size of the public debt is reaching unsustainably high levels. There is already a ten percentage point divergence from the ceiling of 60% set in the Fiscal Responsibility and Debt Limitation Act. Both the large fiscal deficit and the higher Rupee value of external debt, due to devaluation, have contributed to the unprecedented jump in the public debt to GDP ratio.
Simultaneously, there has been a big rise in the quantum of total external debt. As of March 2018 it stands at $ 91.8 billion, implying an increase of as much as $12.8 billion in the first nine months of 2017-18. Here again, the increase in nine months is as much as 83% of the total rise in public debt in four years, between March 2013 to March 2017, of $16.6 billion.
The exponentially rising debt is clearly the consequence of a record current account deficit already in 2017-18 which would have led to an even bigger fall in foreign exchange reserves if substantially external borrowing had not been resorted to. At the margin, there has been no other option but to seek loans from international commercial banks with higher interest rates and shorter maturity.
Altogether, the year 2017-18 has conveyed a lot of signals about the severe deterioration in most indicators of the state of the economy. The second Finance Team of the PML (N) was unable to arrest most of the negative developments. The bequest to the incoming Government, following the elections, is that of an economy in the grips of a major financial downturn.
(The writer is Professor Emeritus at BNU and former Federal Minister)
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