EDITORIAL: The Monthly Economic Update and Outlook for May 2024 was uploaded on the Finance Division website on 29 May and, not surprisingly, begins on an extremely positive note: “as we approach the end of the outgoing year, signs of economic stability are becoming more evident. GDP growth is on the recovery path, while inflation continues a steady decline.”
The disease, a fragile economy, was correctly diagnosed and the International Monetary Fund (IMF) prescription begun, which needs to be continued.
The Fund’s press release dated 23 May on completion of a two-week mission, after preliminary findings, was self-congratulatory - “building on the economic stabilisation achieved through the successful completion of the 2023 Stand-By Arrangement” - and appreciative of the government efforts to “move Pakistan from economic stabilisation to strong inclusive and resilient growth.”
The question is whether these claims are a source of satisfaction to independent economists or the general public?
Inexplicably, the Update did not include the GDP growth rate, which is available on the Pakistan Bureau of Statistics (PBS) website since 21 May, which claims that the economy witnessed an upward revision in growth for the first two quarters – from 2.5 percent July-September to 2.71 percent and from one percent in October-December to 1.79 percent.
The third quarter as per the PBS registered 2.09 percent growth, giving a projection of 2.38 percent for the entire year. If one assumes that the upward revision of the first two quarters in May was a legitimate upgrade, then the question of the lack of seasonality arises especially as the Update acknowledges that agriculture was the main driver of growth and registered 6.25 percent.
The report further argues that this growth was on the back of improved input supply (tractor sales increased from 56.6 percent) and increase credit disbursement (33.8 percent rise) to farmers – inputs and credit one may assume were earmarked for major crops that incidentally account for only 5.4 percent of total GDP while the major recipients of government largesse were the rich and above subsistence level farmers.
Large-scale manufacturing (LSM) growth, with a 39.7 percent decline in credit (as the government crowded out private sector borrowing) became positive and is expected to remain moderately positive on average throughout the second half of the current fiscal year.
Moderately positive is not defined, which compels one to note that July-March LSM is negative 0.1 percent though the negativity has declined from 6.99 percent in the comparable period of the year before a decline in negativity that is based on the low base in fiscal year 2022-23.
March LSM growth rate has been calculated at 2.04 percent – and this is on the back of food, wearing apparel, leather, wood products, coke and petroleum products (though the report then notes that sales of petroleum products dropped by 11 percent) and cement (a product still being smuggled out of the country to Afghanistan).
There is a need for clarity, i.e.; whether the rise in LSM is calculated on the basis of sales alone, which may imply a decline in inventories rather than higher output.
Independent economists point to rising unemployment, claiming it is as high as 10 percent, amid factory closures and the 40 percent poverty levels in the country today as evidence that LSM growth is sourced entirely to sales.
The report notes that Consumer Price Index (CPI) plummeted to 17.3 percent in April this year against 36.4 percent in April last year though the average July-March figure for the two years is very comparable: 26 percent this year as opposed to 28.2 percent last year.
The feel good factor for the general public is obviously not evident as the rate remains high with independent economists challenging the lower rate on the basis of PBS taking the lowest subsidised electricity tariff into account, instead of the average, and government subsidised prices notified for the Utility Stores Corporation with availability not always ensured.
And as always the report ignores the government’s contribution to inflation through borrowing heavily from the domestic commercial banking sector and injecting the money to fund its current expenditure.
As per the report, “higher expenditures have been observed on the back of 33.4 percent growth in current expenditures during July-March 2024 primarily attributable to a 54 percent increase in markup spending”, which raised the budget deficit, another cause of inflation.
Stabilisation has been evident, though in the external sector, with remittances rising marginally to 23.8 billion dollars July-April 2024, a slight rise from 23 billion dollars in the same period of last year and the current account deficit contracted by 94.8 percent though exports rose marginally to 25.7 billion dollars from 23.2 billion dollars and imports declined from 45.8 billion dollars to 43.4 billion dollars.
Foreign exchange reserves grew to 9 billion dollars on the back of rollovers to be paid with interest to friendly countries.
And Pakistani authorities remained extremely optimistic about foreign investment inflows though the cited data shows FDI rising to 1457.9 million dollars (July April this year) compared to 1348.8 million dollars in the same period of last year.
Therefore, if stabilisation is defined narrowly with only the external sector in mind then Pakistan’s position improved even though the main contributor to stability was borrowed funds.
With the budget expected to be presented to parliament next week, one would hope that the Update compels the economic team leaders to consider reducing current expenditure especially as it is funded through borrowing and to limit reforms to its two most appallingly poor performing adjuncts which have not yet been considered – ending the tariff equalization subsidy for the power sector prior to privatisation and widening the tax net.
Copyright Business Recorder, 2024
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