The Business Recorder has published on the 2nd of February a reply by the Economic Advisor of Ministry of Finance (MOF) to the report by the Institute for Policy Reforms (IPR) on the description of the prospects for the economy of Pakistan by the IMF, following the Ninth Review. It is indeed unusual that the reply is by the Ministry of Finance and not by the IMF office in Islamabad. Also, the discussion should have been in the professional domain and personal attacks avoided.
We recognise that the capacity for economic management with the Ministry of Finance is substantial. However, Pakistan is a functioning democracy and divergent views on economic policies and the state of the economy should be heard. We reply to each of the observations made by the Ministry below.
The first issue is of the impact of the failure of the cotton crop on the GDP growth rate in 2015-16. It now appears that the fall in output in relation to last year is larger at almost four million bales or close to 29 per cent. The share of cotton crop and cotton ginning combined is 2.1 per cent of the GDP. This implies that the direct negative impact on the GDP is 0.6 per cent. If the loss of by-products and the negative impact on rural service activities due to the crop failure are included, the loss of GDP is close to 1 per cent.
MOF claims that the textile value chain will remain unaffected due to larger cotton imports. While the supply gap is close to four million bales, only 15 per cent of this gap has been filled up to December 2015. Large cotton imports in coming months will have a significant negative impact on the current account deficit.
MOF believes that there are other positive factors which will compensate for the cotton crop shortfall. These include big growth in credit to the private sector, large increase in cement dispatches, jump in federal PSDP and the prospect of a good wheat crop.
However, first indications are that the rice and sugarcane crops are, more or less, the same as last year. The Government has agreed to a cut of 14 per cent in the Federal PSDP with the IMF. The large decline in export quantities of many textile and leather products is bound to affect growth of the quantum index of manufacturing.
Further, according to NEPRA, the increase in electricity generation in the first five months is only 2 per cent. The decline in rural purchasing power is also affecting demand for consumer goods and durables. For example, the production of tractors is down by 40 per cent. Half of the industries are either showing negative growth or low growth (below 2 per cent). Overall, it is unlikely that the GDP growth rate in 2015-16 will be substantially in excess of 3 percent.
Third, IPR has consistently highlighted the overvaluation of the rupee. According to the SBP, the real effective exchange rate is higher by almost 22 percent. While this has impacted on exports, IPR has also highlighted the danger of an increase in cheaper imports. In order to tackle this problem, the Government has had to levy large regulatory duties on imports of sugar, iron and steel and cotton yarn. Also, import quantities have increased of iron and steel by 20 per cent, other textile items by 29 per cent, fertiliser by 44 per cent and rubber tyres and tubes by 23 per cent. Overall, it is estimated that in the first six months the quantity index of imports has gone up by 6 per cent. While total imports have declined by 10 per cent in dollar terms, non-oil imports have gone up by 7 per cent, despite lower prices.
Turning to poverty, MOF is of the view that a 4 per cent growth rate and the Benazir Income Support Program (BISP) must have had a positive impact on the poor. Further, the increase in poverty related expenditure during the last two years is 14 per cent. This also should have a positive impact on poverty.
The last reliable estimate of the incidence of poverty in relation to a national poverty line is of 2010-11 by the Social Policy and Development Centre (SPDC). Over 37 per cent of the population was estimated to be poor, with a poverty gap of 8 per cent. On the assumption of no significant change, there are accordingly 9.2 million poor households in the country. As such, the coverage of BISP is 59 per cent, given fully efficient targeting. Further, the average poverty gap of a poor household is approximately Rs 1800 per month. Therefore, the income support may not be adequate for a large number of poor families. In fact, nutrition standards in Pakistan are down to crises levels.
MOF highlights the increase in poverty-related expenditures in the last two years. Actually, the outlay on social safety nets, as reported by the PRSP Secretariat of MOF, has fallen from Rs 662 billion in 2013-14 to Rs 618 billion in 2014-15, a drop of over 6 per cent. Some of this decline is due to cuts imposed by the IMF. IPR is very concerned that the year 2015-16 may witness a big increase in rural poverty due to the precipitous fall in incomes.
The prospect of an increase in the fiscal deficit from the budgeted level of 4.3 per cent of the GDP is strongly refuted by the MOF. IPR appreciates that the cost of the subsidy under the Kissan Package has been fully absorbed by a corresponding cut in current expenditure. However, the reduction of industrial power tariffs by 3 Rs per Kwh will potentially imply an increase in the tariff differential subsidy. Any fall in oil prices should be reflected in a negative fuel adjustment charge.
The provincial cash surplus was Rs 87 billion in 2014-15. IPR maintains that it is highly unlikely that this will more than treble in 2015-16 to the target figure of Rs 297 billion. Provinces have a strong incentive to establish higher expenditure benchmarks for the 9th NFC Award. Also, there is likely to be a shortfall of over Rs 40 billion in revenues from the Gas Infrastructure Development Cess. Therefore, IPR persists with the view that the fiscal deficit in 2015-16 will be higher by up to 1 per cent of the GDP.
MOF highlights the jump in the FBR tax-to-GDP ratio from 8.45 per cent of the GDP in 2012-13 to 9.5 per cent in 2014-15. Actually, 2012-13 was an election year and some tax breaks were given. 2011-12 was a more normal year and FBR achieved a tax-to-GDP ratio of 9.5 per cent in this year. Therefore, there has been little improvement in FBR's performance. Fortunately, these revenues have shown a high growth rate of almost 24 percent in the second quarter of 2015-16, albeit primarily due to increase from indirect taxes.
MOF also claims that the state of the power sector is much better than the assessment of IPR. Apparently, the demand-supply gap has been reduced in the last two years by 1845 MW. However, NEPRA figures tell a different story. The gap is estimated to have risen by 12 per cent in 2014-15 in relation to 2012-13.
Further, MOF also states that industrial consumption has risen by over 13 per cent in the last two years and the share of the sector has risen to the highest level of 29 per cent in FY 2014-15. Consequently, it is asserted that loadshedding has been eliminated. The retirement of circular debt of Rs 480 billion did help in raising electricity generation significantly in 2013-14. Since then, however, it actually fell in 2014-15 and, according to NEPRA, has increased by only 2 per cent in the first five months of 2015-16. Therefore, despite the big fall in fuel costs, the power sector is currently demonstrating a lack of dynamism.
Industrial consumption per consumer was 78941 Kwh per annum in 2007-08, when there was little load shedding. It is estimated at 73287 Kwh in 2014-15. This is lower by 7 per cent. Therefore, it is unlikely that power outages in industry have been completely eliminated. Also, gas load shedding persists currently in Punjab.
IPR maintains that granting of fourteen waivers in nine reviews is an indication of the sympathetic attitude of the IMF. IPR appreciates that the Tenth Review was completed without any need for waivers. However, many of the original program targets, set in 2013, have not been met by 2014-15. The shortfall is 5 per cent in the case of total investment, 18 per cent in savings, 17 per cent in exports, over 60 per cent in foreign direct investment and 5 per cent in the tax-to-GDP ratio. Therefore, the IMF Program has not fully delivered what it promised.
Finally, we submit that as an independent think tank our job is to undertake an objective review of the economic performance of the Government. We have strongly praised the Government's efforts at finalising the CPEC and have argued that the federal PSDP should be larger in order to accommodate CPEC infrastructure projects. We have also appreciated the PM's Kissan Package and the recently announced Voluntary Tax Compliance Scheme. But, in a democracy, civil society must be allowed to highlight risks, challenges and shortcomings.
(The author is a former Federal Minister and MD of IPR)
Comments
Comments are closed.