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EDITORIAL: The government constantly cites the 7.6 percent growth in large-scale manufacturing (LSM) July-January 2021-22 against 1.8 percent in the comparable period of a year before as proof positive that the country remains embarked on a high growth trajectory with the capacity to increase Gross Domestic Product (GDP) which would have a cascading impact on raising tax revenue and lower budgeted expenditure as a percentage of GDP of the government.

Thus, while one explanation is the low base of 2021 yet the January comparison is even starker, with growth in LSM of 8.2 percent against 3.6 percent in January last year. The State Bank of Pakistan website provides the following disturbing details when comparing July-January 2022 with the comparable period of 2021: (i) manufacture of textiles (weightage 23) declined in the current year to 2.9 percent against 4.1 percent last year while in January 2022 the growth was zero this year against 5 percent last year; (ii) manufacture of food (weightage 13.6) declined from 29 percent last year to 3.4 percent this year; (iii) manufacture of wearing apparel (weightage 7.8 percent) rose from negative 38.6 percent last year to plus 18.3 percent this year; (iv) manufacture of chemicals (weightage 8.3) from a growth of 9.2 percent last year declined to 5.4 percent this year; (v) a negative growth in pharmaceutical sector (weightage 6.6) was witnessed — from plus 10.3 percent in 2021 to negative 3.5 percent this year; (vi) manufacture of leather products (weightage 1.6) rose from negative 41.4 percent to 4.5 percent this year; and (vii) manufacture of automobiles (weightage 4) from 6.6 percent last year to 63.5 percent this year — a product purchase by middle to upper middle income earners in this country. In other words, the SBP detailed data provides proof conclusively as to why the price of general use items, particularly food, apparel and pharmaceuticals, are rising and why inflation is hitting the poor and vulnerable a lot more than any other income group.

Credit to private sector (with the LSM a major recipient) rose from 43.6 billion rupees from 1 July 2021 to 26 February 2022 when the policy rate was 7 percent to a whopping 874.3 billion rupees in the comparable period of this year.

However, with a discount rate of 9.75 percent from 8 March 2022 a rise in capital cost may act as an impediment to growth in credit and consequently on LSM growth.

And while exports rose from 16.1 billion dollars July-February 2021 to 20.6 billion dollars in the comparable period of this year (reflecting a rise in the international price rather than in the volume of exports given lower growth rates) imports rose by an untenable 49 percent — from 32.1 to 47.9 billion dollars with implications on the current account deficit which was negative one percent last year against 12.1 percent in the current year. Market capitalization is also on the decline — from 53.22 billion rupees on 1 July 2021 to 40.43 billion rupees by 24 March 2022 or a decline of 24 percent.

However, Federal Board of Revenue (FBR) collections were 3,802 billion rupees (July-January 2022) against 2,916.3 billion rupees in the comparable period of last year (an impressive rise of 30.4 percent) but bulk of this revenue is sourced to imports and with the expected rise in the discount rate in the next monetary policy committee meeting as well as the continuing eroding rupee to absorb the shock of rising imports, the growth in revenue collections is likely to be severely contained due to reduced collection at the import stage.

Meanwhile, non-tax revenue has declined from 941 to 783 billion rupees (16.7 percent decline) while fiscal deficit has risen from 1309 billion rupees (July-January) to 1862 billion rupees in the comparable period of this year — a rise of 42 percent which is extremely disturbing as it will have serious repercussions on inflation though ironically not on the primary deficit which is projected to decline from 416 billion rupees to a provisional 174 billion rupees July-January 2022. The government will meet this widening budget deficit with borrowing — domestically and from external sources. The actual rate at which it will be able to borrow would of course depend on the applicable discount rate and success (or otherwise) of the ongoing seventh review talks with the International Monetary Fund.

SBP foreign exchange reserves have declined from 13.2 billion dollars with the rupee-dollar parity at 155.4 on 24 March 2021 to 12.1 billion dollars on 24 March 2022 but with the exchange rate at 181.74. The exchange rate is an outcome of the economic infirmity that besets the country.

The data in the Economic Outlook released by the Finance Division is prior to the announcement of the relief package by the Prime Minister on 28 February and the industrial package the following day (inclusive of an amnesty for industries barring a few) — packages which envisage higher subsidies, and exemptions currently under discussions in the seventh review talks with the IMF. Unless there is some relaxation, the talks with the Fund will remain inconclusive and that would raise the borrowing costs with implications on the general public that are far higher than the relief package announced — a conclusion that should be evident to the Prime Minister and his government.

Copyright Business Recorder, 2022

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