EDITORIAL: The deterioration in key macroeconomic indicators in less than three months reflected by the differential in the projections made in the Stand-By Arrangement (SBA) documents uploaded on the International Monetary Fund (IMF) website mid-July 2003 and the Fiscal Monitor report released on 11 October 2023 must be a source of serious concern for the country’s economic managers.
The Caretaker cabinet took oath on 17 August, implying thereby that they were in place for nine of the total of fifteen weeks under consideration (the then Prime Minister Shehbaz Sharif dissolved the National Assembly on 9 August) yet in their own defence the Caretakers may argue that they are bound to implement the budget 2023-24, passed by parliament on 27 June 2023, with the concurrence of the IMF as a prior condition for the SBA.
This defence goes out the window if two indicators are considered. First, the government expenditure as a percentage of GDP rose by 20.1 percent as per the Fiscal Monitor instead of the 19.8 percent projected by the SBA.
Two observations are in order: (i) it is unclear whether this upward revision takes account of the scaling down of the Gross Domestic Product (GDP) growth rate – from 2.5 percent as stipulated in the SBA documents (3.5 percent unrealistically projected in the budget documents) to 1.7 percent as noted in a recent World Bank report.
Lower growth in the Fiscal Monitor report than was forecast in the SBA would account for the rise in expenditure as a percentage of GDP; and (ii) the Economic Coordination Committee chaired by the then Finance Minister Ishaq Dar approved the immediate release of 50 billion rupees earmarked for parliamentarians’ schemes on 24 July – a disbursement that blatantly catered to political as opposed to the country’s economic considerations belying the party’s narrative that it saved the country’s economy at the cost of its own popularity; however, the caretakers have massively slashed the budgeted disbursement for public sector development programme funds, the usual policy implemented by our administrations, to bring the deficit down to a sustainable level.
Thus the rise in expenditure is mainly under current and not development expenditure, which explains why the growth rate has been downgraded, the consumer price index upgraded and the public debt - the main source of funding to meet the expenditure rise - has risen since the projections were made in the SBA. This explains while the SBA projected government debt at 70.9 percent of GDP for 2024 the Fiscal Monitor upped it to 72.2 percent.
Second, it is also relevant to acknowledge that the primary balance of positive 0.4 percent is constant in the SBA documents and the Fiscal Monitor report, perhaps an indication that this quantitative benchmark is not up for a waiver or renegotiation at this point in time; however, the World Bank has projected it at negative 0.4 percent for the ongoing year.
Given that the Fund is likely to update its data as and when the staff level agreement on SBAs first review is reached, the World Bank data is a more accurate projection.
The Finance Division’s September (monthly) outlook indicates that the primary deficit rose from 142.2 billion rupees in July 2022-23 to 311.2 billion rupees in July 2023-24 or a rise of 118.8 percent; however, a projection on the basis of available government data, limited to just one month, is not advisable.
In addition, the Finance Ministry sources have informed Business Recorder that the budgeted GDP growth projection of 3.5 percent is retained and hence any projection based on government sources remains a challenge.
To conclude, the focus of the caretaker government to date is not on implementing structural politically challenging reforms but on heavy reliance on realising pledged foreign direct investment and crackdowns on markets infected by widespread speculations/smuggling – be it in the foreign exchange or commodities markets – with a view to taking the economy out of its ongoing deepening economic impasse.
While one would no doubt support these measures yet economic reforms as well as improving governance are critical to ensuring that the economy moves out of the continuing logjam that successive administrations have pushed it into.
Copyright Business Recorder, 2023
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