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The new government has undoubtedly inherited a turbulent economy. The woes are not due only to political instability. International scenario is extremely unkind: The Russia-Ukraine conflict and western sanctions have ominously pushed the world economy to deglobalization and is heralding a new era of stagflation. Not just rising food prices but the very food security, crucially dependent on regular grain supplies from Russia, Ukraine and Belarus, is threatened.

Rapidly falling reserves, unstable exchange rate, rising current account deficit and a runaway fiscal deficit are key challenges. They have caused uncontrollable rise in prices, inflicting misery on low income people. Furthermore, the previous government announced a relief package that not only froze petroleum products prices but also reduced electricity price by more than twenty percent until June 2022. The cost of this package is reportedly Rs 450 billion.

The new government has yet to unveil a game plan for its economic policy. So far it is following a policy of status quo or business as usual. Undoubtedly, more time should be given to the new government to put its house in order. Yet, whatever is being contemplated, doesn’t inspire confidence that difficult challenges would be tackled.

Opposition had taken exception to the relief package announced by the then government and justifiably termed it as a political move. It was thus expected that steps would be taken to curtail its adverse impact if not outrightly withdrawn. The occasion came on 16 April when new prices for petroleum products were to be announced. Granted that it would have been unwise to raise prices to their economic level in one go. But a signal was warranted that henceforth cost recovery would be the goal.

Unfortunately, there was no such signal. The status quo was maintained and prices were left unchanged. The current level of price differential for diesel is Rs.51/liter and Rs.22/litter for petrol, the two main products. This is not an auspicious outcome. It may be a politically correct decision but it ignores ground realities of the economy.

Curiously, it was not limited to leaving the petroleum prices unchanged. A significant amount of additional subsidies was also offered on flour and sugar whose prices were reduced by Rs150/10kg and Rs15/kg, respectively.

It has to be recognised that not raising prices hurts by allowing greater consumption of products than warranted by actual prices. This means higher imports and loss of forex when it is in short supply. There has been a 100% increase in the value of petroleum consumption in the last nine months with 20% increase in quantities.

The import bill at nearly $15 billion was twice the size of $7.5 billion last year for the same period. Overall imports were recorded at $59 billion compared to $39.5 billion last year, showing an increase of nearly 50%. At the current pace, imports are likely to touch the unprecedented level of $77 billion. On the other hand, exports increased by 25% from $18.7 billion to $23.4 billion.

The exports increases are due largely to higher cotton prices internationally which have increased from 85 cents/lb. on 30-6-2022 to nearly 140/lb. cents on 22-4-2022, showing an increase of 65%. Should not the government worry about these trends and reduce such phenomenal growth in imports?

The reserves are depleting real fast. In the last six weeks, a massive decline of $5.3 billion was recorded in the official foreign reserves, down to $10.8 billion on 8-4-2022 from $16.2 billion on 4-3-2022 (which is almost the same level it inherited back in 2018). This must have been the steepest fall in the reserves. Imagine, of this $4.4 billion are reportedly the deposits in the Naya Pakistan Certificates besides much larger deposits from KSA, the UAE and China. Net international reserves are in negative by a long margin.

On the fiscal side, things look fairly grim. A budget deficit target of Rs 3394 billion, or 6.3% of GDP was set.

In the first half of the year, a 21% increase in nominal deficit has been recorded, which increased from Rs 1138 billion to Rs 1372 billion but declined significantly from 2.5% of GDP to 2.1% of GDP. This decline was due to new GDP estimates made available after rebasing at the beginning of this year.

Although, fiscal operations data for Jul-Mar is not available, the outgoing finance minister in a press conference claimed that it was 3.9% of GDP (or Rs 2496 billion). In FY2021, the fiscal deficit was 3.6% during Jul-Mar period but then rose to 7.1% at the close, a full 3.5% added in the last quarter.

Traditionally, the fourth quarter is notoriously expansive. So if we add 3.5% to 3.9% already incurred, the final deficit for FY2022 would swell to 7.4% (or Rs 4736 billion). This is a massive increase in fiscal deficit of Rs 3403 billion last year, a staggering 40% increase. On the other hand, the new finance minister has claimed that a deficit of Rs 5600 billion has already been incurred and in the remainder of the term it would rise to Rs 6400 billion, which is full 10% of GDP. These are frightening numbers. The repercussions for rising inflationary pressures are unfathomable. The time to take corrective measures is now.

Inflationary pressures from external factors are being compounded by sub-optimal choices made at home. Since June, 2021, when foreign reserves were $17.3 billion (which later rose to $20.1 billion in August, 2021) we have lost $6.5 billion (or $9.3 billion since August). This significant decline in net foreign assets of Rs 1.3 trillion is so far behind the slow growth in broad money by merely 3.3% despite an all-time high off-take in private sector credit of Rs 1.2 trillion until 15-4-22. When the loss of reserves is stemmed, it would exacerbate inflationary pressures.

The new government should be concerned that the euphoria witnessed on the occasion of its election to office has significantly subsided as exchange rate and stock market are trading at nearly the same level as before the arrival of the new government.

If the government’s aim is to ride through the tide of exogenously determined events, it may end up carrying the burden of the state of economy it has inherited. Without correcting the serious imbalances in external and fiscal accounts it would accord its seal of approval for their irrevocability and thus share responsibility at the time it goes for the election hustings.

Copyright Business Recorder, 2022

Waqar Masood Khan

The writer is a former finance secretary, government of Pakistan

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