Fragile economy?

EDITORIAL: Fiscal deficit stood at 1.8 percent of Gross Domestic Product (GDP) July-November 2020 against 1.6 percent in the comparable period last year which no doubt is a contributory factor to the Consumer Price Index (CPI) registering above 8 percent growth since August 2020 and then falling to 5.7 percent at the end of January – a rate likely to rise in the immediate future due to a recent significant rise in electricity rates as well as prices of petroleum and petroleum products approved by the Cabinet. Pakistan’s economic team leaders, however, place the major if not the entire onus of rising prices on the private sector (industrialists, wholesalers, retailers and of course, smugglers) of disrupting supplies to profiteers. A research paper uploaded on the International Monetary Fund (IMF) website concludes that during the lockdown countries experienced low demand of products other than food and medicines which raised their prices, like in Pakistan. However, the report added that headline inflation took a nosedive driven by energy prices though core inflation (excluding food and energy) also declined. In Pakistan, however, a heavily taxed petroleum and energy sector remained a major source of government revenue and perhaps accounts for a significant portion of the 22.2 percent rise in revenue (tax collections grew by 5 percent from 2101 billion rupees July-November 2019 to 2206 billion rupees July-November 2020 while non-tax revenue grew from 566 billion rupees to 666 billion rupees by 17.7 percent). Sources for the rise in non tax revenue have not been identified in the report but the budget documents for 2020-21 indicate that non-tax revenue would decline to 1.108 trillion rupees in the current year against 1.296 trillion rupees in the revised estimates of last year. In addition, the budget for the current year envisages a decline in: (i) income from property and enterprise (inclusive of 3G/4G licenses which were budgeted to decline to 27 billion rupees from 125 billion rupees realized last year), and (ii) from receipts from civilian administration, particularly SBP profits which were budgeted to decline to 620 billion rupees in the current year against 785 billion rupees, budgeted though the actual realized last year was much higher. A rise of 19 billion rupees was budgeted from miscellaneous receipts though these include services provided by the state, including passport fee, which probably nosedived due to the pandemic. With no privatization having taken place during the pandemic there is greater reliance on debt equity for example sukuk and Treasury Bill auctions – a source that explains why the fiscal deficit rose when the primary deficit (excluding debt repayment and servicing) remained in surplus.

Expenditures rose by 14.5 percent to 2383 billion rupees July-November 2020 against 2081 billion in the comparable period of the year before accounted mainly by a 15.7 percent rise in current expenditure (in spite of savings by the presidency, the prime minister’s house, ministries and a significant reduction in foreign travel by cabinet members particularly the prime minister) while development outlay increased by 11.3 percent to 128 billion rupees from 115 billion rupees last year. The rise in development outlay compared to the year before is unlikely to be sustained given that the budgeted amount for development is 51 billion rupees less this year in comparison to the year before.

Looking at the plus side, the report notes: (i) current account surplus of 1.1 billion dollars July-December 2020 due to “domestic economic recovery”; however, the major contributor to this remained a persistent rise in remittance inflows, registering a rise of 24.9 percent which, as per the State Bank of Pakistan report, are projected to decline in response to the global recession: (ii) Large Scale Manufacturing rose by 7.4 percent (July-November 2020) though conveniently ignored is the fact that the base was extremely low given that the growth was negative 24.8 percent April-June 2020 on the back of severe contractionary monetary and fiscal policies implemented by the economic team leaders; (iii) Karachi Stock Exchange index rose however the New York index also rose but US economists correctly pointed out that this did not raise the income of the poor but that of the rich; and (iv) with respect to agriculture the report notes that “on the basis of input availability, better weather forecast, and achievement of more than 90 percent sowing target area of wheat in Punjab, wheat is expected to meet its target.” One would have hoped that wheat’s market availability at a reasonable price based on actual cost had been noted in the report.

There is more reason to be concerned at the data shared with the public than a source of satisfaction especially as some of the existing easement in policies may have to be revoked if the IMF staff level agreement on the second mandatory review is to be reached. The claim of SBP reserves of 13.1 billion dollars against 11.3 billion dollars last year also does not present the real picture as more than half of these reserves are debt – swaps with other countries and foreign banks. One can only hope some revisit of claims and policies in the coming cabinet meetings.

Copyright Business Recorder, 2021