EDITORIAL: There is a level of comfort internationally in the improvement of key macroeconomic indicators - higher foreign exchange reserves to a shrinking of the current account deficit with Pakistan Stock Exchange soaring to a historic high — strengthened by the visiting mission of International Monetary Fund’s (IMF’s) negotiating another longer term package.
However, as Business Recorder has repeatedly pointed out (i) reserves of 9120 million dollars as of 2 May 2024 are almost entirely debt-based (rollovers by friendly countries and the Fund’s recent 1.1 billion dollar disbursement); (ii) the contraction in the current account deficit was on the back of import restrictions; however, as per the Fund report on the second and final review, “a more muted import rebound is now expected, reflecting favourable commodity price changes and a larger than anticipated drop in food and cotton imports, given domestic agricultural recovery, while exports are slightly higher”.
This optimism may be misplaced as the Middle East crisis continues coupled with a wheat crisis in Punjab due to the flawed decision to import the commodity in spite of a projected higher domestic output, a scam that has been pushed under the carpet, and violent protests in AJK which prompted the Prime Minister to allocate 23 billion rupees subsidy (cheaper flour and lower electricity tariff); in addition, workers remittances declined from the high of 31.3 billion dollars in 2021-22 to projected 28.081 billion dollars this year; and (iii) debt to GDP ratio is expected to decline sharply driven by fiscal consolidation and ex post negative real interest rates as per the Fund report.
However, domestic debt has risen massively this year (as access to the budget 6.1 billion dollars from external commercial bank borrowing and issuance of debt equity could not materialise with a downgrade in Pakistan’s rating, which incidentally remains downgraded) leading to lower manufacturing output though the negativity declined to 0.51 percent July-February 2024 against negative 3.97 percent in the comparable period the year before.
The AJK unrest does bring to the forefront the fact that the capacity of the general public to withstand any further increase in prices notwithstanding a decline to 17.3 percent in April this year from 20.7 percent in March remains compromised for two reasons. Firstly, even if one takes the inflation figure as accurate, though independent economists estimate it as understated by 2.5 to 3 percent, the fact of the matter is that there has been no appreciable increase in either income (only state sector employees drawing salaries at the taxpayers’ expense were budgeted a pay rise in recent years though that raise too was less than the rate of inflation) but there have been widespread layoffs due to the contracting large-scale manufacturing sector.
The budget deficit has risen by 34.8 percent July-February this year compared to the year before (a highly inflationary policy) and credit to the private sector, a basic input shrunk by 54 percent this year compared to the year before – a shrinkage that leads one to conclude that the decline in the negativity of the LSM may be based on lower inventories due to higher consumption. The stipend for Benazir Income Support Programme was raised from 2916 rupees per family per quarter to 3500 rupees per family – an amount not likely to accommodate the rise in prices.
With the wheat farmers out on the streets in Punjab, there is a fear that the AJK contagion may well spread to other parts of the country, made all the worse by fatalities, which would be difficult to manage particularly as the AJK protest was spontaneous and not being led by any political party. The feel good factor simply does not exist and favourable media reports or indeed a positive spin to the state of the economy is not enough to provide the feel good factor to the common man.
The major source of revenue sadly remains from indirect taxes (70 to 75 percent of all direct taxes are also collected in the indirect tax through the all encompassing tax withholding regime in the VAT mode whose incidence on the poor is greater than on the rich), which adds to the burden on the poor. The poverty levels in this country as estimated by the World Bank last year were at a disturbing high of 40 percent, a percentage point higher than Sub-Saharan Africa (SSA) and projections for the current year are that it may well have surpassed it further.
The luxury of implementing policies that may rely on raising existing taxes (which need urgent reforms), or imposing tariffs that reflect full cost recovery (with 40 percent of our electricity bill comprising of taxes the government should take the bold decision to dedicate these taxes to resolve financial issues of the sector as well as abandon the policy to extend more than 500 billion rupees as annual tariff equalization subsidy) and instead of borrowing to meet current expenditure, locally or abroad, slash it mercilessly for a year to two at least, to gain leverage with the Fund and other multilaterals for the benefit of the people of this country.
Copyright Business Recorder, 2024
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