EDITORIAL: The January Outlook and Update uploaded on the Finance Division website claims that “the first half of fiscal year 2024 has ended with economic stabilisation.” Accompanying data, however, suggests that this claim has been defined extremely narrowly premised on the performance of the three July-December macroeconomic indicators, projected as reflecting a trend, data that many an independent economist recently challenged as being overtly manipulated.
First, large-scale manufacturing (LSM) registered positive 1.59 percent growth in November 2023 against negative 4.85 percent in November 2022 though the average of July-December 2023 remained in the negative territory at 0.80 percent against negative 2.33 percent in the comparable period of the year before.
While the low base in November 2022 accounted for the decline in the negativity in November 2023 yet it is also relevant to note that the LSM growth does not gel with the 35.7 percent decline in credit to the private sector, a major input for the LSM sector, or recent loud laments by industry zeroing in on the high cost of borrowing, crowding out private sector borrowing due to a massive rise in government borrowing, and the rising utility prices due to the implementation of administered prices as per conditions agreed with the International Monetary Fund (IMF) under the ongoing Stand-By Arrangement (SBA).
The Update restates for the second month running that there has been an improvement in high frequency indicators that were not undefined and, therefore, possibly visible to only the Ministry of Finance, while claims of better crop prospects have borne fruit, a natural outcome after floods in the previous year.
Second, the report argues that external stability has been achieved with current account deficit at 0.8 billion dollars July-December 2024 against 3.6 billion dollars in the comparable period of the year before. Reserves too are up from 3.087 billion dollars (a slump due to Dar’s flawed policy to control the interbank rupee-dollar parity that gave rise to multiple exchange rates, resulting in 4 billion dollar loss in remittance inflows through official channels, a policy that is in violation of the agreement with the IMF under the then ongoing programme that led to systematic suspension of other bilateral and multilateral assistance) to 8.211 billion dollars today, which are largely borrowed funds. Two further observations are in order.
First, remittances are lower by 6.8 percent July-December this year compared to the comparable period last year – from 14.4 billion dollars to 13.4 billion dollars reflecting the difficulties in convincing Pakistani remitters to return to official channels instead of the illegal hundi/hawala system.
And secondly, the trade deficit July-December 2022 was 15.4 billion dollars which has narrowed down to 9.9 billion dollars but what is relevant to note is that in spite of being on an active Fund programme today, after the approval of the first tranche by the Fund Board, the budgeted 6.1 billion dollars from borrowing from commercial banks abroad and issuing debt equity remains unmet due to Pakistan’s rating remaining unchanged since the SBA was approved in July last year.
It is little wonder that not only is domestic borrowing up, a major contributor to inflation, as the money is used to support current as opposed to development expenditure, but explains why the budget deficit is up by 43 percent July-December this year as opposed to the year before.
And finally, the report concludes that while revenue is up there is “significant pressure on expenditures attributed to higher markup payments.” True but higher markup has contributed to higher profits of state-owned entities accounting for a 116.5 percent rise in non-tax revenue — far outpacing the rise of 30.3 percent in FBR revenue that, in the face of no change in the tax structure, continues to be largely from indirect taxes (up to 80 percent of total revenue) whose incidence on the poor is greater than on the rich.
If one removes the element of rising interest payments then as noted in the Update “the government is taking measures to manage non-markup spending which is evidenced by a continuous improvement in primary surplus” — from 889.6 billion rupees first six months of 2022 to 1812.2 billion rupees in the same period of 2023.
In the first review of the SBA the government claimed that 115 billion rupees was unbudgeted expenditure by the Punjab government on commodity operations, which would be budget neutral as Punjab has pledged to adjust this amount in this year’s expenditure (a task that is likely to be passed onto the elected government); however, no other expenditure in any other statistical compilation has been cited as having been slashed - other than Public Sector Development Programme (PSDP) that is.
True that PSDP declined by only 5.9 percent during the first half of this year compared to the year before yet the difference is that this year the budgeted PSDP was 950 billion rupees against last year’s total of 727 billion rupees — a rise of 31 percent.
Two other key data that impact on the quality of life of the common man and compromises the government’s claim of economic stabilisation are: (i) a rise in inflation July-December 2023 to 28.2 percent against 25 percent in the first half of last year, a margin that is higher if the December inflation is taken into consideration — 29.7 percent against 24.5 percent; and (ii) exchange rate at 279.6 to the dollar on 29 January 2024 against 262.65 to the dollar on 27 January 2023 –- a condition of the SBA.
To conclude, had the Update claimed that adhering to the IMF policies has so far not paid dividends for the general public other than to strengthen the foreign exchange reserves one could have agreed but to claim improved performance at a time when 40 percent of the public is below the poverty line and nearly 70 to 75 percent of the population struggling to meet their kitchen budgets in many instances at the cost of their health/education budgets, claims of achieving economic stabilisation sound hollow.
Copyright Business Recorder, 2024