EDITORIAL: Pakistan’s projected growth rate for the current year is 4.3 percent while 4 percent is projected for 2022-23 as per the World Bank report titled “The South Asia Economic Focus, Reshaping Norms: a New Way Forward” — a rate lower than that projected by the outgoing Khan administration’s Finance Minister Shaukat Tarin who had projected a rate of 5 percent for the current year and 6 percent for the next fiscal year.
While an incumbent finance minister does have a natural tendency to exaggerate growth as it reflects on his own performance yet Pakistan’s economy performed worse than Bangladesh’s which is projected to register a Gross Domestic Product growth rate of 6.4 percent, and India with 8.9 percent. Nepal and Sri Lanka rely heavily on tourism as a source of revenue.
These two countries performed worse than Pakistan due to continuing travel restrictions at 3.7 percent and 2.4 percent, respectively. However, what is disturbing is that next fiscal year Pakistan’s growth is projected by the World Bank as the lowest in the region at 4 percent, Nepal at 4.1 percent, Bhutan at 4.4 percent, Bangladesh at 6.7 percent, and Maldives at 10.2 percent. Sri Lanka’s growth rate is not projected due to its default on foreign loans.
Why Pakistan’s performance will be the lowest next fiscal year has been the subject of these columns again and again. The agreement with the International Monetary Fund (IMF) was effectively at an end when the then Prime Minister Imran Khan announced an unsustainable relief package on 28 February due to the brewing political crisis which World Bank chief economist endorsed, adding that the package would increase fiscal vulnerabilities and advised Pakistan to carefully watch the fiscal balance amid rising external debt vulnerabilities and domestic debt vulnerabilities.
Indicators of ability to pay such as the ratio of public external debt service to exports and remittances is highest in Pakistan and Sri Lanka, the report notes, which, given Sri Lanka’s announcement of default and violent street protests, must bring the need for immediate mitigating policy measures to deal with the crisis that must include slashing current expenditure which was allowed to rise from 4.3 trillion rupees in 2017-18 to well over the budgeted 7.5 trillion rupees in the current year given the relief package. And rising interest rates in the West may lead to outflows from Pakistan putting further pressure on our currency as Pakistan grapples with external debt.
The World Bank report laments Pakistan’s low exports to GDP ratio (at 10 percent), requiring tariff rationalization to encourage manufacturers to export and compete in global markets but does not dwell on the looming current account deficit crisis. The trade deficit exceeded 35.4 billion dollars July-March and reserves are less than two months of imports which is the most compelling reason to initiate talks with the IMF on the stalled seventh review.
It is highly doubtful if the new government will be able to improve on the politically challenging but economically critical conditions agreed in the sixth review without a reversal of the relief package. The only flexibility in the short-term (three months or so) for the Shehbaz Sharif-led government would be to improve the administrative measures to check food prices, and target subsidies to only the vulnerable through the Benazir Income Support Programme.
Microfinance borrowers represented 94 percent of approved applications for loan deferral or restructuring which account for a massive rise of 42.78 percent in non-performing loans of microfinance banks. Imran Khan’s Kamyab Pakistan Programme, including youth entrepreneurship scheme, envisaged free to cheap credit to target groups which if implemented would further raise non-performing loans. However, the World Bank notes that microfinance sector accounts for 3.6 percent of total loans therefore any stress is likely to be localized.
There is no mention of the Sehat Sahulat Card in the report; however, there is a need for the new government to request an actuarial audit of the entire programme to ensure that it is financially sustainable; and if not then perhaps limit it to the vulnerable again through BISP (Benazir Income Support Programme).
Irrespective of the spirited defence in the face of mounting criticism of the handling of the economy by the previous government it has clearly reached an impasse. And as former finance minister Hafiz Pasha stated to Business Recorder the onus of implementing corrective policies lie squarely with the Ministry of Finance as there is simply no more space in the monetary policy with a high discount rate and an eroding rupee which has been reversed to some extent from 8 March — the day the Monetary Policy Committee raised the discount rate by 250 basis points and Shehbaz Sharif was elected the prime minister. However, perhaps a new IMF programme may provide a tad more flexibility to the new government instead of negotiating the seventh review of the ongoing programme.
Copyright Business Recorder, 2022
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