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EDITORIAL: The Economic Update and Outlook for August 2023 uploaded on the Finance Division website ended as always on an optimistic note: “higher and inclusive growth target of 3.5 percent for fiscal year 2024 with some facilitation measures have commenced some dividends in July 2023 and Fiscal Year 2024 started with some encouraging signs and expectations – Monthly Economic Indicator (MEI) observes positive growth after February 2023.”

In the body of the report a graph clearly shows MEI rising from July 2023 (with August data not available and February 2023 data not included) and notes that the data underlying July MEI are still provisional and maybe revised next month. If one adds the extremely concerning macroeconomic indicators cited in the update, notably, negative 15 percent growth in large-scale manufacturing sector (fuelling unemployment and raising the numbers falling below the poverty line) as well as the recent decision to further raise the prices of electricity and petroleum products in line with the agreement made with the International Monetary Fund (IMF) under the ongoing Stand-By Arrangement (SBA) that has upped the Consumer Price Index to 28.3 percent in July, the following statement is inexplicable at best: “MEI calculated for July 2023 shows the revival of economic fundamentals, as it recorded positive growth after February 2023. It lays the foundation of inclusive growth and is expected to be positive throughout the current fiscal year to achieve the targeted growth of 3.5 percent.”

The SBA envisions monetary contraction (22 percent policy rate at present expected to be further raised in the next Monetary Policy Committee meeting) and also limits fiscal deficit (with a 9.4 trillion rupee target) designed to curtail inflation while implementing pro-poor policies; however, there are contradictions in the policy matrix. First, the focus of the SBA is on ensuring that utility and petroleum prices reflect full cost recovery.

While administration after administration has argued that this implies passing on the increase in the international prices of fuel onto the consumers, with an in-built element of higher domestic costs associated with a depreciating rupee, yet it also includes: (i) meeting overly generous contractual obligations with Independent Power Producers (particularly those established under the China Pakistan Economic Corridor as all previous ones have made a deal with the government), (ii) antiquated and dilapidated transmission/distribution network with huge losses, (iii) theft which the government has announced it will deal with an iron hand though sadly this measure would be largely borne by the poor consumers, and (iv) significant indirect taxes whose incidence on the poor is greater than on the rich (sales tax and advance income tax). This policy thrust alone is pushing low and lower middle income earners below the poverty line.

A more advisable approach would have been for the Caretaker government in general and the finance ministry in particular, to take the lead role and widen the tax net by undertaking reforms that no political government has been able to implement so far.

Second, remittances continued to decline in July 2023 - by 19.3 percent - a decline that began due to the inane policy of the then finance minister, Ishaq Dar, to administratively control the rupee-dollar parity and keep the PKR overvalued, which reactivated the illegal hundi/hawala system. While the external rupee value is no longer being controlled as per the SBA prior condition yet the Ministry of Finance together with the State Bank of Pakistan would have to incentivise remittance inflows through official inflows before overseas Pakistanis begin to prefer this routing.

Third, the data shared in the report is mostly for last fiscal year; however, a few metrics relate to period up to 29 August 2023, including foreign exchange reserves of 7.8 billion dollars (subsequent to the SBA more than 5 billion dollar loans were received from friendly countries), a rise in Pakistan Stock Exchange index by 6.5 percent, an increase in market capitalization in rupees of 4.2 percent (a positive spin as in dollar terms this reflected a decline of 1.6 percent), and a continued decline in credit to the private sector (1 July to 16 August) of negative 178.6 percent.

Finally, the report shows a fiscal deficit of 24 percent higher in 2022-23 compared to the year before – the outcome of a rise in current expenditure by an inexplicable 21 percent compared to what was budgeted (in spite of the extremely narrow fiscal space available last year compounded by the cessation of all foreign assistance due to the failure to reach a staff level agreement with the Fund attributable to Ishaq Dar’s sustained recalcitrance.

One would hope that the Caretaker Finance Minister exercises her leverage with domestic stakeholders and not only cuts the budgeted rise in current expenditure - 26.5 percent higher than the revised estimates of last fiscal year - but also manages to convince the stakeholders to voluntarily slash their own budgeted allocations.

Copyright Business Recorder, 2023

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KU Sep 11, 2023 11:12am
The last time anyone ever heard about ‘’voluntarily’’ and ‘’spending cuts’’ was perhaps in 1948 after partition, but even then, the clever leaders and baboos emphasized this ‘’spirit de voluntary’’ to be practiced by their subordinates and people, while they continued a lifestyle befitting the Raj. The amusing thing is that the government is in a check-mate position and this perhaps is probably a first for the leaders and the company they keep, and they are now pushed to do the unthinkable, to actually work honestly and justly.
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