Money Matters

Flimsy defence

By Ihtasham Ul Haque
Mon, 11, 16


The eight-month long controversy over Panama Papers has eclipsed economic decision making, causing problems for the five major sectors - agriculture, exports, fiscal deficit, exchange rate policy, and foreign direct investment (FDI). Pending matters and unnecessary delays in these sectors are negatively affecting the country’s fragile economy.

In addition to that, infrastructure projects related to the China-Pakistan Economic Corridor (CPEC) are getting delayed, as the government released only seven percent of the funding from the Public Sector Development Programme (PSDP) during the first quarter of the current financial year.

This may hamper completion of the fast-track projects related to Gwadar, railways, etc. While PSDP funding on CPEC is slow, there has been 100 to 150 billion rupees cut on Chinese funding in the first quarter, compared to the corresponding period last year. Normally 20 percent funding is provided from the PSDP for the first and second quarters, which then is further increased during the remaining two quarters. 

FDI, one of the major components of GDP, has gone down by an unprecedented 48 percent, and nothing is being done to address this issue.

Insiders say that most of the ministers, including the finance and commerce minister, are increasingly busy defending the prime minister and his family over their controversial financial matters. This is leading to major delays as far as economic decision making is concerned.

Agriculture sector that forms 23 percent of Pakistan’s GDP has been facing delays like the wheat support price announcement, which is announced at the start of November.

Farmers are confused in the absence of the new wheat procurement price which currently averages Rs1,250-1,300 per 40 kilogram. The farmer community is hoping to get an increase in the price, as they were given to understand by the federal and provincial governments.

Exports are another victim. Prime Minister Sharif had promised a $2 billion package to the exporters; however, the Panama Papers controversy has delayed the package, which is necessary to arrest the declining exports.

Exporters are also complaining about the current exchange rate being artificially maintained by the central bank. Pakistani exports would remain uncompetitive if the rupee is not brought down. The gap between open market rate and the inter-bank rate has widened by over Rs2 which is unsustainable.

Fiscal deficit has widened by 1.4 percent of GDP which will culminate at six percent by June 30, 2016-17 against the target of 3.8 percent. The first quarter had already witnessed Rs470 billon fiscal deficit (1.4 percent of GDP), and 3.8 percent target (Rs1,250) is unlikely to be met, which may end up at Rs2,000 billion, considering revenue shortfalls. Trade deficit has risen 22 percent on year-on-year to $9.2019 billion in the first four months, while home remittances have dropped 3.8 percent in July-Oct  period.

Since there is no check by the IMF after the completion of its $6.1 billion Extended Fund Facility (EFF), the government is heavily borrowing from the State Bank. Around Rs800 billion were borrowed only during the first quarter of the current financial year, and who knows how much would be borrowed till June 30, 2017 to help the government to meet its day-to-day expenses.

On November 10, the Senate Standing Committee on Finance concluded that all governments had been faking revenue collection figures, and that targets were met only by further squeezing the existing tax payers. The committee headed by Senator Saleem Mandviwala was of the view that the PML-N government’s statements on the economy were false, including the budget deficit.

Interestingly, the FBR chairman admitted in the meeting that revenue collection target of Rs3.62 trillion was unrealistic to achieve. The committee was told that the FBR was unable to collect required taxes during the first four months of 2016-17 despite charging advance tax from different sectors. FBR officials were thoroughly grilled by the committee members over weak revenue collection, forcing its chairman to say that it was due to low oil and commodity prices, a usual argument also made by the finance and commerce ministers. In its internal papers given to the finance ministry, FBR claimed it collected Rs860 billion during the first four months of 2016-17, registering 4.4 percent growth. The important question, however, is whether the FBR will achieve 14 percent growth over last year.  

The World Bank in its Pakistan Development Update launched earlier this month appreciated the economic growth and said it was picking up and might reach 5.4 percent by year end. The report said investments were pouring in from China and the public sector and the economy was enjoying a rare period of stability with reserves rising and fiscal deficit shrinking. The WB report is the same as IMF, which it released after the EFF was completed.

However, the WB report expressed its concern over no progress on human development indicators since 2010. It also warned that hope for reviving the economy through CPEC could be impeded by significant delays due to problems from revenue mobilisation. It also predicted that exports would continue sliding while remittances could also come under pressure given the impact of low oil prices.

Similarly, the WB said the power sector should be on a sustainable footing and further reforms were needed in the public sector. “Fiscal stabilisation, revenue accumulation and the public sector management need far reaching reforms,” the report said.

Independent economists often criticise such reports by calling them a pack of lies and self-serving, not meant to turnaround the economy in the real sense.

These economists maintain that the FBR is inefficient and promotes corruption while the central bank is increasingly politicised. Without stronger institutions there is no concept of development.

Privatization has almost stopped but its minister seems too busy but only on TV shows and TV beepers. So is Miftah Ismael head of Board of Investment (BOI) who takes his job casually and perhaps that is why there is unparalleled 48 percent drop in FDI. Ministers for finance, water and power, commerce, defense, planning and development and others are also too active to save their prime minister and his government rather than justifying their presence in their respective ministries.

The writer is a senior journalist based in Islamabad