As the fiscal year 2018-19 is drawing to a close, a full picture is emerging about how precariously the key economic balances are faring and whether the responses formulated for the IMF programme would be effective to face the challenges.
Let us first review the recently announced balance of payments results. The 11-month current account deficit has declined from $17.9 billion to $12.7 billion, a reduction of $5.2 billion or by 29 percent. This is a decent decline but insufficient to put a real dent in our external balance. Last year, the deficit was 6.2 percent of GDP which has come down to 4.8 percent, a mere 1.4 percentage points.
However, the more concerning aspect is the source of this improvement. Imports have declined by 5.9 percent, from $51.5 billion to $48.5 billion, a small decline of only $3.0 billion. Much to everyone’s dismay, exports have also fallen by 1.8 percent from $22.8 billion to $22.3. The reason behind the poor performance of exports is adverse terms of trade, since significantly more quantities were shipped at lower prices than in the past. This has characterized exports during much of the last five years. Consequently, the trade account has shown a minor decline of about 10 percent, from $28.7 billion to $26.1. Evidently, the trade account has contributed to only half the improvement in the current account of $5.2 billion.
There is an improvement in the services account also but this improvement has been partially neutralized by many items in the income account except the remarkable increase in workers’ remittances. Consistently, since the start of the fiscal year, remittances have shown exceptional growth. From a meagre growth of 4.4 percent for the 11-month period last year, remittances have increased at 10.4 percent, from $18.2 billion to $20.2 billion, an outstanding growth on a very high base. At this rate, remittances will close at $22 billion, nearly as much as the country’s exports. It is hard not to attribute this growth to massive depreciation of rupee, which has made the value of transfers significantly higher for the recipients. This $2 billion growth explains much of the improvement in current account other than the modest improvement in the trade account.
The above analysis begs the question: were the much-trumpeted efforts to lessen the current account deficit successful? At one level, the simple size of the reduction has been modest, a mere 29 percent, whereas it should have been cut by half at least. But more importantly, as we argued above, the source of adjustment is not from the real culprit, the trade account, which showed a minor decline of 10 percent. This is not a surprising result if we look at what is happening to that other account which is the real source of economic instability: the fiscal account.
The budget documents have given a peep into how the current year would end regarding fiscal balance. The revised estimates for 2018-19 indicate that the deficit for the year would be 7.2 percent. This is significantly higher than the budgeted deficit of 4.9 percent, or 5.1 percent as modified in the mini-budget in last October. The over-run of more than 2.0 percent has contributed to continued demand pressures that inevitably translate into higher import demand. But the real worrying aspect is to recognize that the revised estimates are palpably over-estimating revenues and under-estimating expenditures.
To see this, consider the revised estimate for tax revenue, which is given at Rs4150 billion. The 11-month collections were Rs3300 billion. Last year in June, the tax collections were Rs567 billion, which included Rs92 billion of the tax amnesty scheme. Even if we ignore this it is hard to believe, given negligible growth in 11-month collections, that there would be growth this month compared to last June. This means it would be a stretch to reach a figure of Rs3900 billion. Thus, compared to revised estimates, there would be a shortfall of Rs250 billion.
On the other hand, the revised expenditure on interest payments at Rs1987 billion is significantly under-estimated. Some analysts have suggested it could be as high as Rs2200 billion, giving an over-run of Rs213 billion. Taken together, and assuming every other revised estimate is tenable, the two add up to Rs463 billion, or 1.2 percent of GDP. The likely deficit for the current year would be 8.4 percent, a staggering number.
What the above analyses demonstrate is that the initial conditions are far more grim than what must have gone during IMF programming. Apart from the possibility that the Fund may demand additional measures to compensate for poor base-year results, the danger is that everything has become so much more difficult to achieve than what it would be had the revised estimates were realistic. One implication is that the tax increase would be for Rs1650 billion, nearly 3.75 percent of GDP.
Turning to other indicators, GDP growth is estimated at 3.3 percent compared to the target of 6.2 percent while inflation has increased to 9.2 percent. This would jump further once the tax measures go into effect from July 1. The exchange rate has depreciated close to 30 percent from Rs121 per dollar to Rs157 per dollar. There is no previous example of such massive exchange rate adjustment in a single year. The interest rate during this period has increased from 6.5 percent to 12.25 percent, or by a mammoth 570 bps in a single year. Foreign direct investment has fallen by 49 percent while portfolio investment has fallen by 108 percent. The stock market has remained bearish throughout the year, losing 7000 points from 42,000 points on 1-7-2018 to 35,000 points on June 21, 2019.
We are not despondent with the herculean task that the government faces in reviving the economy. But the government seems broiled in continuing political uncertainty and rising confrontation with the opposition. Such an environment would fritter away the critical energies needed to focus on the economy. Economic managers would face a more constrained space to operate in. It is therefore imperative that a modicum of working relationship is worked out with the opposition to help lower the fast increasing political temperatures.
Under circumstances, it would be doubly more challenging to successfully perform under the Fund programme. The country is not in a position to face a failure of the program.
The writer is a former finance secretary. Email: waqarmkngmail.com