The lingering challenges on the economic front coupled with increasing political turmoil are giving rise to disturbing developments at a time when the focus of the ruling elite must have been on steering the country out of crisis mode. However, this wish is unlikely to be granted because the stage is set for the eruption of another political upheaval and having no insight the crisis is seen deepening in weeks and months ahead.
Within next two weeks, Pakistan’s economic managers must focus on two important issues.
First is the passing of the budget 2019-20 in a smooth manner so that all prior conditions of the International Monetary Fund (IMF) could be fulfilled and Advisor to PM on Finance Dr Abdul Hafeez Shaikh and Governor State Bank of Pakistan (SBP) Raza Baqir will be able to sign Letter of Intent (LOI) after completion of Macroeconomic and Financial Policies (MEFP) framework on the basis of which the IMF’s Executive Board will consider Pakistan’s request of $6 billion under 39 months Extended Fund Facility (EFF) probably next month.
Second, the Financial Action Task Force (FATF) is scheduled to meet in USA this week and the Pakistan Tehreek-e-Insaf (PTI) government led by cricketer-turned-politician Imran Khan must ensure smooth sailing through raising diplomatic and political support of at least three countries to avoid ending up in the blacklist. This is the most important requirement demanding full attention of the incumbent regime.
On the economic front, the government claims that they inherited an economy that was already in shambles. Its official documents presented before the highest economic decision-making constitutional forum of National Economic Council (NEC) argued that the outgoing fiscal year 2018-19 started with the highest ever current and fiscal deficits coupled with rising inflation. Structural and macroeconomic imbalances of acute nature could not be sustained for longer period of time and thus an adjustment process that started in December 2017, started taking its toll on growth momentum.
Keeping in view the macroeconomic imbalances in the last two fiscal years (2017 and 2018), the slowdown was forecast even in January 2018 projections of the IMF, World Bank, and Asian Development Bank (ADB). The highly overvalued exchange rate that persisted for three consecutive years has inflicted irreparable damage to the prospects of the economy.
The economic growth decelerated from 5.5 percent in 2017-18 to 3.3 percent in 2018-19. Agriculture faced a long dry spell during the last almost two years. It had serious repercussions for the output of the farming sector, which continued to put up a poor show. It registered only 0.8 percent growth during the past five years. The external account adjustment was successful as the current account deficit during the third quarter of 2018-19 has almost halved over the second quarter.
However, fiscal deficit adjustment could not achieve desired results owing to massive tax short-fall and rising debt servicing liabilities due to increasing interest rates both in internal and external markets as well as 34 percent depreciation during the last 12 months. The rupee is still trapped in a devaluation spiral and there’s no knowing where it’s going to end. It is imperative for the PTI-led regime to take masses into confidence instead of allowing uncertainty to continue to weigh on the economy.
Against desired GDP growth of 6.2 percent based upon sectoral growth projections for agriculture, industry, and services at 3.8 percent, 7.6 percent and 6.5 percent, respectively, the actual growth turned out to be at 3.3 percent supported by agriculture (0.85 percent), industry (1.4 percent) and services (4.7 percent).
The growth target was ambitious at the time of its presentation and it became a big question when agriculture sector faced unprecedented water scarcity as water supply was inadequate for Kharif and Rabi crops. The large-scale manufacturing sector had already started decelerating since April 2018 and continued to register negative growth. Construction sector remained victim of shrinking Public Sector Development Programme (PSDP) and ban on non-filer for different transactions. Services sector performance also came under stress owing to the spillover of the commodity sector and lower imports.
Debt servicing cost also increased with rupee depreciation, further widening fiscal deficit amid limited sources of revenue generation. These factors acted as a drag on overall growth and the gross domestic product (GDP) growth was registered at 3.3 percent in 2018-19.
The total investment for 2018-19 was recorded at 15.4 percent of the GDP, lower than the target of 17.2 percent and also actual 16.7 percent in 2017-18. Fixed investment-to-GDP ratio stood at 13.8 percent in 2018-19, lower than last year’s 15.1 percent. National Savings was 11.1 percent of GDP which is below the target of 13.1 percent but higher than last year’s 10.4 percent of the GDP.
Fiscal deficit is likely to widen further in the year under review, primarily because of revenue shortfall and rising expenditure demand. Revenue shortfall is the culmination of demand compression with Rs70 billion due to lower petroleum products imports plus relief provided in the sales tax by reducing it to 17 percent as compared to the past 25-30 percent. Import compression of other items also cost in terms of foregone revenues of Rs25 billion. Supreme Court ruled to withhold another Rs40 billion on mobile phones calls. Rs40 billion is the impact of last government’s tax incentives to taxpayers.
During the first nine months of the current year, fiscal performance is characterised by substantial rise in the fiscal deficit to 5 percent of the GDP in July–March 2018-19 as compared to 4.3 percent during July-March 2017-18. Consolidated total revenue stood at Rs3,583.7 billion, which is 0.04 percent higher than the total revenue of Rs3,582.4 billion collected during the same period of the last year.
The policy rate stood at 12.25 percent, which implies an increase of 650 basis points since January 2018. Money supply (M2) grew by 3.9 percent (Rs.625.2 billion) during July-April 2018-19 as compared to 4.1 percent (Rs601.8 billion) during the corresponding period of the last year.
Scheduled banks witnessed net contraction of Rs2,131.7 billion during July-April 2018-19 as compared to retirement of Rs466 billion in the comparable period last year. The government borrowing from the SBP increased substantially and stood at Rs3204.7 billion as compared to Rs1,316 billion last year. Notwithstanding fuelling inflationary expectations, this shift in borrowing from scheduled banks to SBP may create space for credit to private sector, which expanded by Rs580.9 billion during July-April 2018-19 compared to the expansion of Rs498.4 billion last year.
Inflation remained on an upward trajectory during 2018-19. Inflationary pressures initially emanated from non-food side but after December 2018, food inflation became major a driver of inflation. Headline inflation averaged at 7 percent for July-April 2018-19 compared to 3.7 percent in July-April 2017-18.
Average Sensitive Price Index (SPI) was also higher in July-April 2018-19 at 4 percent as against 0.8 percent in July-April 2016-17. Similarly, average Wholesale Price Index (WPI) stood at 11.7 percent in the same period compared to 2.8 percent last year. The inflation in the first ten months has increased mainly because of: unprecedented supply shocks in the case of essential food items such as tomatoes and green chilies, a higher than anticipated increase in international oil prices, an upward revision in domestic gas prices, a further increase in regulatory duties on imports, and the continuing second round impact of previous exchange rate depreciations.
The current account deficit for July-March 2018-19 stood at $9.58 billion compared to $13.58 billion in July-March 2016-17 indicating some improvement in current account deficit which stood at 4.4 percent of GDP now, compared to 5.7 percent in July March 2017-18.
The trade deficit during the first nine months of 2018-19 stood at $21.3 billion with exports of $18 billion and imports of $39.3 billion. During July-March 2018-19, exports decreased by 1.3 percent compared to an increase of 11.9 percent in July-March 2017-18, whereas imports declined by 4.9 percent compared to an increase of 18.8 percent in comparable period of 2017-18.
With this dismal performance on all macroeconomic fronts, the government’s expectations of generating Fedral Board of Revenue’s collection to the tune of Rs5,555 billion will be highly ambitious and possesses potential risk to derail the next IMF program anytime in next fiscal year.
The writer is a staff member