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EDITORIAL: Monthly Economic Update for April uploaded by the Finance Division on its website accurately notes that “economic recovery is underway, still domestic and international scenario is changing over the course of time.

Thus, inflationary and external sector risks are building macroeconomic imbalances.” Political pundits may zero in on the continued possibility of early elections that is generating considerable uncertainty in Pakistani markets, in spite of some stabilisation of the rupee, subsequent to raising the price of petroleum products (though by less than 50 percent required to eliminate unfunded subsidies), as well as raising the discount rate to 13.75 percent on 23 May; however, economic pundits are focused on the budget scheduled for 10 June as the economic treatise of the incumbent government that would determine whether the International Monetary Fund’s seventh review is successful that, in turn, may provide critical input to the timing of the next elections.

This indicates that stakeholders are no longer considering the merits or demerits of the ongoing IMF programme signed in May 2019 and are focused instead on its continuation that would presage the disbursement of the next tranche — a focus that is economically justified given the 10.542 billion dollars foreign exchange reserves held by the State Bank of Pakistan on 26 April 2022 that are not sufficient for even 2 months of imports and maybe a lot less if the international price of oil and products continues to rise.

The Update notes that total credit to private sector business rose from less than 443.7 billion rupees in July-March 2021 (with fixed investment accounting for 137 billion rupees and working capital 110.8 billion rupees) against 1.198 trillion rupees in the comparable period of 2022 (333.1 billion rupees for fixed investment and 608.7 billion rupees as working capital, including trade financing).

An expansionary monetary policy was at play during this period to counter the effects of the pandemic. The rise in Large-Scale Manufacturing growth was 7.8 percent in the current year against 2.2 percent last year; however, this growth was not on the back of textiles (2.9 percent growth), leather (2.1 percent), or wearing apparel (20.6 percent) but for wood products (174 percent), furniture (345.2 percent) and automobiles (59.8 percent) — items whose purchase was almost certainly deferred by households during lockdown associated with the pandemic and therefore may reflect inventories more than an increase in output.

Inflation rose from 8.3 percent July-March 2021 to 10.8 percent in the comparable period of this year attributed to upward price movement of imported items exacerbated by the Russia-Ukraine war, supply chain disruptions and recovery in global demand as per the Update.

However, two domestic contributory factors were not highlighted: (i) domestic debt rose from 25.552 trillion rupees July-March 2021 to 28.07 trillion rupees in the comparable period of 2022 — a rise of 10 percent against a reported rise of less than 6 percent growth in GDP; (ii) current account deficit of 13.2 billion dollars July-March this year against 275 million dollars last year reflecting a widening trade gap; and (iii) a rise in fiscal deficit from 1,652 billion rupees in July-March 2021-22 to 2,566 billion rupees in the comparable period of this year — a rise of 55 percent that will be steeper as unfunded subsidies from April and May are factored in.

The silver lining — rising remittance inflows — continued in July-March 2022 in comparison to the same period of last year: from 21.4 billion dollars to 23 billion dollars. Federal Board of Revenue collections also rose by 28.9 percent — to 4,375.6 billion rupees July-March this year against 3,393.7 billion rupees collected last year; however, the major contributor to the revenue rise can be gleaned from the rise in imports from 38.1 billion dollars last year to 53.8 billion dollars in the current year made possible due to an expansionary monetary and fiscal policy which, if the seventh review is to succeed, will be contractionary with a commensurate decline in tax collections.

And finally, the Update notes Public Sector Development Programme (PSDP) authorisations as opposed to disbursements and declares that there was a rise of 22.5 percent in authorisation July-March this year compared to last year; however, the amount actually disbursed will be verified in the budget documents.

The higher growth is premised on not only relative to the low base/poor performance last fiscal year but also on sales sourced mainly to inventories. The quality of life has plummeted due to inflation which is expected to continue if the seventh review is successful — a prognosis that is bound to hurt the political fortunes of an elected government.

Copyright Business Recorder, 2022

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