EDITORIAL: The Working Paper for the Annual Plan Coordination Committee (APCC) meeting acknowledged that the “growth supportive policies induced aggregate demand pressures hence the tenuous spillover between growth acceleration and the external sector vulnerabilities resurfaced.”
This statement from an economic theory perspective cannot be faulted, and was fully and publicly endorsed by the then finance minister, Shaukat Tarin, in the first week of November 2021, when he said: “I would not like to see 6 percent (growth) this year. That’s going to be damaging for our economy, the GDP growth would be capped between 5-5.5 percent this year.”
The 6 percent growth rate being projected for the current year is thus a source of serious concern for three reasons: (i) though it is claimed as an achievement by former prime minister and his cabinet, yet it is sourced to a dramatic rise in demand/consumption, which rose from the targeted 50.2 trillion rupees to provisional estimate of 63.95 trillion rupees (27 percent rise), deferred during the pandemic, which had inflationary implications leading to a rise from the targeted 8 percent to 13.3 percent; (ii) higher inflation accounted for a disturbing decline in national savings — from the projected 15.4 percent target to 11.1 percent.
This in turn accounts for the heavier reliance on foreign savings, read external borrowing, that rose significantly during the current year with external resources inflow (net) rising from 377 billion rupee target to a whopping 2.723 trillion rupees; and (iii) total investment (that should have risen if the manufacturing output rose as a consequence of higher demand rather than through sale of inventories stockpiled during the pandemic associated lockdown/deferral of purchases) actually declined as a percentage of Gross Domestic Product — from the target 16.1 percent this year to provisional estimate of 15.1 percent.
As stated in the working paper “while growth surpassed envisaged target of 4.8 percent (the target is on old base so might not be truly comparable) with the wide margin and registered strong growth of 5.97 percent. This growth was contributed by agriculture sector (4.4 percent), industry (7.2 percent), services sector (6.2 percent) and all three sectors also surpassed their respective sectoral targets. However, there remained a question mark on the quality of economic growth as it is primarily generated by excessive demand driven consumption.” Again this is an impeccable economic logic.
The need to dampen aggregate demand at present is of paramount importance that requires an entire range of politically challenging, severely contractionary, monetary and fiscal policy decisions. Monetary policy decisions are on course with the discount rate elevated to 13.75 percent, expected to be further revised upward that would have negative implications on private sector credit as capital becomes too expensive, and the rupee-dollar parity declining that would contract imports and therefore strengthen the trade deficit that reached the unprecedentedly high level of nearly 40 billion dollars (July-April). The withdrawal of subsidies extended under the 28 February relief package has raised inflation by 6 percentage points in the short-term though in the medium to long-term it is likely to dampen demand with a consequent impact on lowering inflation.
Another source of concern is that while federal tax revenue collected rose by 29.1 percent (July-March 2021-22) primarily sourced to imports which fuelled domestic demand compared to the year before, non-tax revenue declined by 14.3 percent with petroleum levy (PL) the main contributor and subsidies rose by 181.6 percent (largely due to unfunded subsidies on POL and electricity, announced on 28 February) as well as grants by 116.8 percent. Federal Public Sector Development Programme July-March was authorised 16.9 percent more than in the previous year, however, with the relevant minister Ahsan Iqbal claiming that not a single penny was available for disbursement in last quarter of the current year there would be a significant shortfall.
Three projections in the working paper for next fiscal year require a revisit. First, consumption rise to 73,249 billion rupees from the provisional target of 63,951 billion rupees in the current year against 43,936 billion rupees last year.
This is too high a target for next year given the contractionary policies expected to be in place to reactivate the ongoing IMF programme and is hardly likely to achieve the 12.5 percent national savings target for next year — a rise of 1.4 percent from the current year. Second, fiscal deficit has widened to 4 percent July-March this year against 3 percent last year and reports suggest that Prime Minister Shehbaz Sharif is considering a significant slash in government expenditure for next fiscal year though one would have to wait for the budget to get the actual figure. And finally, the projected growth target of 5 percent next year is unlikely if the IMF seventh review is to succeed and the Fund programme not derailed subsequently.
There is no doubt that the state of the economy is a source of serious concern to the current team of economic managers and one would hope that they are extended full support to implement harsh conditions that, given the state of the economy today, are no longer an option but an imperative.
Copyright Business Recorder, 2022