LAHORE: "This fiscal year too, the economy missed most of the targets," says a review by the Institute for Policy Reforms.
The Institute issued its comments on the Pakistan Economic Survey released on Friday by the government. It said the effect of Covid-19 has further retarded what was already slowdown prior pandemic struck.
GDP growth will be negative, understandably, but it would have missed its target by a wide margin even otherwise. Revenue is falling. Also, exports have declined, debt has grown, and despite the recession, inflation is taking its time to recede. For years, the economy has been in a vicious circle of weak growth, leading further to weak fundamentals. Added to this was some unwise economic policy making during the year.
Three factors affected the economy. First, demand reduced due to high interest rate and change in Rupee value with increase in most administered prices. Second, supply side issues with high input costs hampered production. This way, businesses suffered both from the demand and supply sides. Third, public finance was hit by high debt servicing and continued subsidies for PSEs and tariff differential.
Regarding tax collection, even prior crisis, there was no visible increase in FBR revenue. Government revenues grew because of SBP and PTA profits. Contrary to how widely it was advertised, there was no reform of tax administration. In fact, GoP's reforms brought transactions to a halt without any gain in collection. This harmed the economy even more which had been affected already by high interest rates and Rupee depreciation. Tax amnesty also did not work.
Against an initial unrealistic estimate of Rs. 5,555 billion (since revised to Rs 4,800 billion), FBR tax revenue will leave a massive gap of about Rs 400 to Rs 500 billion. Expanding the direct tax base entails political cost. As in the past, government took the easy route of raising indirect taxes. These taxes are driven by demand and transactions volumes. With soft demand and a hold on transactions, indirect taxes also did not grow sufficiently.
All GDP sectors performed below target. Manufacturing, especially LSM, was hit as demand fell and input cost rose. Agriculture has suffered from continued weak policy and underinvestment. Decline of productive sector meant less demand for services, which declined by 0.6 percent. Even with double digit markup, finance and insurance grew by less than 1 percent.
This year's one achievement is reduction in the current account balance by 71 percent. Ten-month actual current account deficit is $3.3 billion. It is expected to stay well within this year's target of $8.3 billion. Trade deficit for July-April FY 20 fell by 29.5 percent.
As exports have fallen and increase in remittances is quite modest so far, the correction in current account balance is mainly because of fall in imports. Fall in imports affects exports, investment, and GDP growth. Fall in Rupee value created an anti-export bias.
Along with low technology content in our production base, low savings and investment are the most enduring predicament of our economy. National savings is 13.9 percent of GDP. Domestic savings (i.e. national savings minus remittances) was a paltry 6.9 percent of GDP. Fall in savings lead to a fall in all other indicators of investment, manufacturing, and exports. These are key indicators for the growth and health of the economy.
Whereas tax revenue grew by 14 percent, current account expenditure was 23 percent higher in July-March FY 20 compared to the same period last year. Of this, 42.5 percent was debt servicing. There is no progress in reducing subsidies. Revenue losses in DISCOs have continued. Resultantly, PSDP has seen cuts. This too depressed GDP growth.
Total debt and liabilities stood at almost Rs 43 trillion or over 98 percent of GDP. Debt and liabilities have grown by Rs 2.6 Trillion from the debt stock on 30 June 2019, or 6.5 percent. In June 2018, total debt and liabilities were 29.8 trillion, so we have seen an addition of over Rs 13 trillion in 21 months.
External debt and liabilities are now over 42 percent of GDP. Measured in dollars, public debt has grown from $75.5 billion in June 2018 to $86.4 billion in March 2020. Total debt and liabilities stood at $110 billion end March 2020, compared to $95.1 billion in June 2018, up over 16 percent.
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