EDITORIAL: Disturbing macroeconomic data was released over the weekend by the Ministry of Finance, the Pakistan Bureau of Statistics (under the administrative control of the Ministry of Planning, Development and Special Initiatives) and the State Bank of Pakistan as follows: portfolio and foreign domestic investment declined by 78 percent, the rate of growth of imports was double that of exports leading to widening of the trade deficit, fiscal deficit rose to 2.5 percent of the GDP in the first half of the current year against 2.3 percent in the comparable period of the year before, while tax collections rose from 2.42 trillion rupees to 2.5 trillion rupees in the comparable period of 2021, yet this was lower than the shortfall in non-tax revenue which declined from 924 billion rupees during the first six months of 2019 to 895 billion rupees in the current year. Sensitive Price Index (SPI) rose further in the week ending 25 February 2021 by 2.41 percent with PBS pointing out that during the past one year electricity charges rose by 86 percent though its contribution to SPI is limited to its low weightage (though its impact on input costs is considered significant). The SBP website indicates that reserves have strengthened but swap arrangements with China and foreign commercial banks, estimated at 9 billion dollars are, as per SBP accounting, not debited as liabilities but nonetheless adds on to the country’s debt.
Good news was limited to remittance inflows that registered a growth of 24.1 percent July-January 2021 against the comparable period of the year before – a growth that, as per Prime Minister Imran Khan, reflects the confidence of our overseas workers in his administration, specific initiatives taken by the SBP as per its Governor but also almost certainly partly due to the lockdown associated with the global pandemic, redundancies due to recession in the Middle East.
So where does the country stand today and can all the blame be laid at the doorstep of the pandemic? First off it is critical to note that the Federal Board of Revenue (FBR) was informed recently that its new target as agreed with the International Monetary Fund for the current year is 4.7 trillion rupees, down from the budgeted 4.9 trillion rupees, though the Board had indicated that it would be hard pushed to generate more than 4.5 trillion rupees in the current year. SBP profits as a component of non-tax revenue exceeded the budgeted 406 billion rupees in 2019-20 to 1.13 trillion rupees as per the SBP on the back of “high interest rate prevalent in the first three quarters of the year (that) allowed the bank to accrue significant amount of interest income from the interest-sensitive assets, particularly lending to government and income from bank’s open market operations…further, during the year, the liquidity mop up operations were relatively low reducing the interest expense.” This situation is unlikely to be repeated in the current year given the ongoing pandemic as well as the reduction of the interest rate from 13.25 percent to the current 7 percent. Loans to private sector for working capital declined to 39.8 billion rupees July-January 2021 compared to 63.8 billion rupees last year though under subsidised schemes post-Covid-19 LTFF rose from 24 to 80.6 billion rupees and export refinance facility from 68.7 to 77.2 billion rupees as per the data released by the Finance Division.
Second, it is necessary to note that the current government expenditure has not been curtailed irrespective of claims to the contrary (though there has been a marked reduction in expenditure by the Prime Minister, the President and some ministries yet this amount is too small a percentage of the total to have impacted on total expenditure). Development outlay has reportedly risen from 444.3 to 476.6 billion rupees July-December 2021; however, these are authorisations and not actual disbursements.
The gains made in the current account as well as in portfolio investment inflows due to the rupee depreciation and the high discount rate are beginning to erode and the primary surplus (minus borrowing) continues to show a surplus but the rise in the budget deficit indicates a historically high reliance on borrowing - domestic debt has risen from 16.5 trillion rupees in August 2018 to 23.7 trillion rupees in September 2020 while external debt has risen from 93 billion dollars to over 115 billion dollars. The only good news is a significant rise in remittance inflows which one would hope will be sustained and measures required to ensure that inflows through unofficial channels are not preferred once the lockdown is over must be formulated and implemented.
Copyright Business Recorder, 2021
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