After presenting finance supplementary (second amendment) bill 2019, before the parliament last week, Pakistan Tehreek-e-Insaf- (PTI) led government is all set to unveil macroeconomic and medium-term budgetary framework for outlining its five-year targets and strategy on economic front, this week.
After presenting finance supplementary (second amendment) bill 2019, before the parliament last week, Pakistan Tehreek-e-Insaf- (PTI) led government is all set to unveil macroeconomic and medium-term budgetary framework for outlining its five-year targets and strategy on economic front, this week.
It aims at sharing its roadmap for steering the economy out of crisis mode and putting it on the path of sustainable growth.
But this macroeconomic framework is highly inconsistent in its present form, which also attracts strong-worded criticism from renowned economist Dr Hafiz A Pasha, who termed it as highly flawed and having no consistency on any accounts.
Things are moving neither as expected, nor in the desired direction, despite their claim that the immediate crisis was over following receiving bailout packages from friendly countries. However, the government is ignoring that this breathing space is short-lived and will eventually evaporate in the next few months because the makeshift arrangements will not help overcome the twin deficits. These gains are destined to be lost in a short span of time, if things don’t change. Second, an increasing political temperature can also melt the economy further.
Deafening sloganeering billowed from the opposition benches, when Finance Minister Asad Umar was delivered his speech, tabling the second supplementary finance bill of this government in the lower house, which leaves no doubt the political mercury is shooting up.
The second budget that basically tackles medium-term problems of affluent investors, industrialists, and stock market players, fails to come up with a solution to the looming crisis.
A crisis has the external front in its jaws as the foreign currency reserves are continuously depleting despite some generous financial assistance from Saudi Arabia, Unite Arab Emirates (UAE), and China. China had provided $2 billion in the first month (July) of this fiscal year. Saudi Arabia and UAE committed $3 billion each as balance of payment support and started transferring installments, but foreign currency erosion continues unabated. It demonstrates that the macroeconomic imbalance still is hampering the economy and the government will have to take more steps to improve its yawning current account deficit.
This second finance bill has proposed nothing for improvement in current account deficit, rather it decreased Regulatory Duty (RD) on a number of items assuming that the reduction in cost of doing business will help expand industrial sector and create exportable surplus. However, in the short-term, it might mount pressure on imports bill.
On other side, the budget deficit, considered mother of all economic ills, is mounting towards at least 6 percent of the GDP. It simply means that the debt burden is going to increase around Rs2,200 billion to 2,300 billion at a time when the government is not ready to pick up liabilities of circular debt and other heaps of losses from public sector enterprises.
With this background, the PTI-led government is set to unveil its macroeconomic and medium-term budgetary framework that has serious issues of inconsistencies.
For instance, it envisages growth in exports by 15 percent in terminal year of 2022-23 of this regime, while it targets imports growth at just 4 percent. These projections are inconsistent because there is strong a correlation between growth in imports and exports.
It’s assumed that almost 60 to 70 percent inputs in the shape of raw material and semi-finished products are imported for making finished products for exports.
The raw material is imported and then finished exportable products are made from it. With a 4 percent growth in imports, a growth of 15 percent in exports is a hard to imagine let alone achieve?
The regime figures the real GDP growth rate at 3.3 percent for the current fiscal year under macroeconomic framework and they projected it will go up to 6 percent by end of their tenure in 2022-23.
On the other hand, the current account deficit has been projected to fall steeply ranging from 6.1 percent of the GDP in the last fiscal year to 0.2 percent by the end of this regime’s tenure in 2022-23. With this assumption, the investment and savings will have to almost double in next five years –a next-to-impossible feat to pull off.
The savings to the GDP ratio stands at 10.4 percent of the GDP, which will have to increase up to 20 percent of the GDP. On the front of investment to GDP ratio, standing at 14.6 percent of the GDP, it requires to be jacked up to 25 percent of the GDP.
The exports, which stood at $24 billion, will have to jump to $60 billion in five years, while imports growth will have to suppress in a big way in a bid to slash down the trade deficit. The remittances that stood in the range of $20 billion will have to be increased substantially.
The government claims that they sought comments from multilateral creditors such as the World Bank and Asian Development Bank on this proposed macroeconomic framework and their comments would be incorporated in the final document.
However, if the government claims that its macroeconomic and budgetary framework is consistent it can be checked through World Bank’s model known as Revised Minimum Standard Model (RMSM) to check its consistencies.
The RMSM was originally created in 1973 as a means of ensuring a consistent approach to World Bank projections and thus facilitate inter-country comparisons. These objectives are met through the provision of a standard list of variables and a minimum set of economic relationships. The RMSM is a ‘thinking and planning’ tool.
Its primary purpose, like the original two-gap models, is to show the user what levels of investment, imports, and external borrowing will be required for a targeted real GDP growth rate. The planners’ choice of a real growth rate will determine what level of investment will be necessary.
On other hand, some members of the high-profile Economic Advisory Council (EAC), constituted by Prime Minister Imran Khan, are happy because the government opted for ‘pick and choose’ and selected few retirees of the donor-funded consultants to show the macroeconomic framework but the EAC as a whole was bypassed. But the officials close to Finance Minister Asad Umar claimed that the minister instructed to convene EAC meeting this week to ensure consultations with all members and this document will be made public after incorporating their comments.
The writer is a staff member
