Money Matters

Writing on the wall

January 29, 2018
By Mehtab Haider.

The government of Pakistan and International Monetary Fund (IMF) are still sorting out differences over macroeconomic projections especially related to twin deficits - the current account and the budget- for this fiscal.

Insight

The government of Pakistan and International Monetary Fund (IMF) are still sorting out differences over macroeconomic projections especially related to twin deficits - the current account and the budget- for this fiscal.

The macroeconomic projections remained a major bone of contention during the last round of parleys held under post program monitoring (PPM) in November 2017 and finally both sides agreed upon finalising projections to be presented before the Fund’s executive board after receiving data for the period until the end of December FY18.

The IMF mission, led by Herald Finger, is supposed to give final touches to its report on Pakistan by up to February 15, 2018, after which it will be circulated among the members of the Fund’s executive board. It is expected that the IMF board will take up the PPM report by end February or early March 2018 after which it will be released on their website.

The current account deficit had peaked to $7.4 billion in the first six months of the current fiscal year against around $4 billion in the same period of the last fiscal, indicating the government’s measures for placing tariff and non-tariff barriers had so far failed to yield the desired results. The government had slapped regulatory duty on luxury items in a bid to discourage their imports. The ministry of commerce also placed non-tariff barriers, especially those related to food stuff, for slashing the import bill and the concerned quality standard entity was directed to stop issuing no objection certificate for bringing these items into the country.

These steps were taken, but very late and this laidback attitude caused much damage to the country’s economy already, evident from rising trade and current account deficits. The government had also announced an incentive package for exports and as a result Pakistani products started fetching double-digit export earnings; however, to get exportable surplus, the exporters will have to undertake long-term plans for expanding industrial and manufacturing base. A quantum leap in our exports in the years to come warrants policy interventions for incentivising industrial sector over trade.

Now the current account deficit has emerged as a major problem for the country’s economy. Multilateral creditors such as the IMF, World Bank, and Asian Development Bank believe in this phase of political transition it was next to impossible for the government to take more measures to control the yawning deficit in the external account. The officials of multilateral creditors based in Islamabad seemed sympathetic with the new economic team led by Miftah Ismail, the advisor to Prime Minister on finance, because reversing the downturn into a turnaround during the election year was not an easy task for the government.

Pakistan’s current account deficit stood at $12.4 billion in the last fiscal year (2016-17), but the finance ministry, on the eve of the budget, grossly under-projected it at $10 billion for the current fiscal year, despite Planning Commission’s vehement objections.

Now, the ministry has revised its projections for the current account deficit upward from $10 billion to $14 billion. Keeping in view the current account deficit situation in first half of this fiscal, it seems impossible to restrict it at $14 billion without taking additional measures for discouraging imports and boosting exports. The tax refunds worth billions of rupees are still stuck with the Federal Board of Revenue (FBR) and the government is weighing different options to clear this backlog in a big way before upcoming general elections.

Also, the IMF is revising its current account deficit related projections, which will be forwarded to its executive board through PPM report. The second most important number is related to the budget deficit and it becomes more important during an elections year.

Although, the government has not yet firmed up its budget deficit number for the first half (July-Dec) period of the current fiscal but officials at the finance ministry are claiming their initial assessment estimated the budget deficit at just over 2.3 percent of the GDP, which might go up slightly after finalising this figure.

The government had figured the budget deficit at Rs1479 billion or 4.1 percent of the GDP with the expectation that the provinces would generate surplus revenue worth Rs347.3 billion for the current fiscal year. Now the finance ministry is saying that it had jacked up its budget deficit target around 5 percent of the GDP for the current fiscal year.

Keeping in view the trends of the last one decade, Pakistan’s budget deficit can be divided into 40:60 ratio for the first and the second half of every financial year. So the budget deficit is going to cross 5 percent of the GDP in any case if it stands at 2.3 percent of the GDP for the first six months of the current fiscal year.

There is a need to analyse what happened in the last fiscal year related to the budget deficit. The government had envisaged the budget deficit at 3.8 percent of the GDP for 2016-17 then it was increased to 4.2 percent of the GDP. Keeping in view massive tax revenue shortfall, the budget deficit was jacked up to 4.6 percent of the GDP and finance ministry continued to stick to this number till the last moment.

It was a surprise for all when the budget deficit peaked to 5.8 percent of the GDP for the period ending June 2017 and ministry accused the provinces of overspending and thus hiking the budget deficit by one percentage of the GDP instead of generating surplus revenues.

Now the question arises: What is the guarantee that this will not happen during the current fiscal year? No one can answer it, because provinces are not bound to generate surplus revenue under any defined and agreed mechanism.

Renowned independent economists have made their own projections for twin deficits for the current fiscal year. Dr Hafeez A Pasha, former finance minister, sees the country’s current account deficit at $16 billion for the current fiscal year.

Dr Ashfaque H Khan, former advisor finance ministry and reputed economist, argued that the current account deficit could go up to $18 billion for the period under review because in the last quarter it used to be in the range of 30 to 32 percent, so it might go close to $18 billion. On the budget deficit, Khan said that the finance ministry brought changes in the definition of calculating the budget deficit.

If one sticks to the definition of fiscal year 2012-13 then the budget deficit could touch 8 percent of the GDP, but if you follow the finance ministry’s latest definition, the budget deficit could go up to 6.5 percent of the GDP for the current fiscal year.

Finally, the challenges are enormous and without taking all acts together it will be impossible to steer the economy out of crisis. If remedial measures are not taken promptly then seeking another bailout package from the IMF is the writing on the wall.

The writer is a staff member