EDITORIAL: Annual Plan Coordination Committee (APCC) met under the chairmanship of the Minister for Planning, Development and Special Initiatives Ahsan Iqbal projected a growth rate of 3.5 percent for next fiscal year premised on three major assumptions.
First, given the very low base for the current year (0.3 percent as per the government and in the negative realm as per many independent economists) the projection for next year may reflect a healthy percentage growth rate but in total terms it may well be below the total Gross Domestic Product of 2021-22.
However what would certainly be a dampening effect on next year’s GDP growth projection is the overstating of the growth of the agricultural sector in the current year based on government’s post-floods estimate of loss of agricultural produce and livestock.
Second, the services sector contributing a little over 58 percent to GDP suffered a setback in recent months due to the persistently high inflation (Sensitive Price Index registered over 40 percent year on year in the week ending 1 June 2023), high unemployment due to negative 25 percent growth in large- scale manufacturing sector in March this year — a trend worsening with each passing month, given that the July-March average is negative 8.1 percent which, in turn, is fuelling unemployment levels.
The appalling performance of these macroeconomic indicators can be sourced to seriously flawed policies that include heavy government borrowing from the domestic commercial sector (which in turn is crowding out private sector credit with severe negative implications on growth), lower tax collections from imports as administrative controls persist with the objective of prioritising external debt servicing and payment of principal as and when due.
True that this has contained the current account deficit, cited as an achievement by the Finance Minister Ishaq Dar, but the cost, as always, is to be payable by the public for his failure to undertake a cost benefit analysis of policy decisions — a usual undertaking by economists.
And finally, what is baffling is the insistence by the government to present a people-friendly budget (high subsidies, higher allocation for Benazir Income Support Programme), with pro-export measures/tax exemptions while allowing traders/wholesalers (major contributors to the services sector) to remain outside the income tax net, to galvanize the PML-N (Pakistan Muslim League-Nawaz) support base in the forthcoming elections without access to external financing (subject to an agreement on the pending ninth review with the International Monetary Fund) which would imply even more irresponsible borrowing domestically that would effectively more than neutralize the subsidies to all productive sectors as well as the poor and vulnerable.
The critical question today, based on reports emanating from the Ministry of Finance that re-engagement with the IMF will be undertaken by the interim or the next elected government, is when will it become imperative for the next government to engage with the IMF on the existing stalled ninth review or negotiate another programme? With the term of parliament ending on 13 August one may assume that finance minister Ishaq Dar would retain his portfolio till that time and hence budgeted subsidies on essential food items, lower petroleum levy, pro-export fiscal/utility incentives and higher salaries for the military as well as the civilian administration will be implemented though these measures would not be able to check inflationary pressures as government borrowing domestically will have to catapult further into the red zone.
Foreign exchange restrictions will have to continue as without the IMF green signal donors, multilaterals and bilaterals, are unlikely to re-engage with the country. In other words, Pakistan will go into a deeper recession which would make any mitigating policy measures by the next government all the more politically unviable as they would require a sacrifice from the people.
This newspaper holds no brief for presenting a budget by the coalition government at this time and especially not by an economic team that has persistently violated the terms of the agreement with the Fund (based on sound economic policies — a trend that began after the seventh/eighth IMF review agreement reached in August 2022, which enhanced the programme package, extended the scheduled end and combined two reviews), failed to undertake structural reforms and instead passed on the onus of poor performing sectors, particularly power and tax sectors, onto the hapless consumers, and last but not least, persistence in the obviously mistaken view that a new less harsh programme with the Fund will be possible after a possible successful re-election bid.
It is, therefore, extremely difficult to determine the relevance of the budget measures in the absence of successful completion of the ninth review by the Fund as that alone will determine whether the budget is a self-detonating bomb poorly disguised as an election year budget or not.
Copyright Business Recorder, 2023