There are worrying developments in the economy which, if not arrested immediately, will have serious consequences for an already current precarious state of economy.
Notwithstanding PTI Government’s claims to the contrary, December 2021 data has brought a new high in headline inflation, which was recorded at 12.3 percent, up from 11.5 percent in November 2021 and 8 percent in December 2020. This is the highest level of headline inflation since February 2020. Sensitive Price Index (SPI) too peaked at 20.9 percent and Wholesale Price Index (WPI) climbed to 26.2 percent for December 2021.
While the Government officials are highlighting the decrease in month-on-month inflation in food prices, they have completely ignored the more serious development of core inflation that is fast seeping in the system. Both Urban and Rural core inflation have increased by 1.1% on month-on-month basis and recorded at 8.3% and 8.9%. This is an alarming price hike and is not going to disappear any time soon.
The continuing inflation throughout the entire tenure of PTI government (August 2018-December 2021) would not look surprising if one considers the massive increase in “money supply” which has been recorded at 17.4% in fiscal year 2020 and 16.2% in fiscal year 2021. Such phenomenal expansion in money supply when GDP growth was either negative or modest throughout PTI tenure was bound to unleash the unbearable inflation which the nation has been facing.
Current Account Deficit:
In a curious development, by adopting this expansionary policy, the Government has undone its own policy which it adopted to bring down the current account deficit, which it had termed the worst menace it had inherited. Another manifestation of what wrong this policy has brought is to look at the external account, (discussed below), which is facing a runaway current account (CA) deficit virtually rising to the same level in just one year, where PMLN government had reached in its last fiscal year. For ready reference, in PMLN’s first three fiscal years (2013-16) the annual CA deficit was in the range of US dollars 4 billion and in it’s last two years CA deficit rose to dollars 12 billion and dollars 19 billion in fiscal years 2017 and 2018 respectively, which mainly triggered due to imports related to machinery to end 18 hours of average daily load shedding, security related payments, capital goods and plant and machinery.
The numbers on CA deficit for end-December 2021 have not yet been available to public. However, CA deficit at end-November 2021 for first five months of current fiscal year was recorded at $7.1 billion or giving an average of $1.4 billion per month. At this rate, the annual CA deficit would be close to $17 billion, very close to $19 billion in the last fiscal year 2018 of PMLN Government.
Another tsunami of inflation is in store with the recent introduction of of another mini-budget which is proposing levy of GST on exempted goods or enhancing the rate wherever it is below 17%, total items involved around 144. This would mean collection of additional Sales Tax of Rs.343 billion, Income Tax Rs.7 billion and Motor Vehicles related Rs.23/25 billion additional revenue. Furthermore, there are going to be new levies of higher customs duties and regulatory duties on imports. Moreover, PTI government also plans to add Rs.4 per month in petroleum levy until it reaches Rs.30 per liter which is the maximum statutory limit, a levy Imran Khan used to publicly criticize as being unfair and rogue tax.
PTI ministers have callously described that the impact/burden of aforesaid tax measures imposed through the mini budget would only be Rs.2 billion on the common man. This is like sprinkling salt on people’s wounds who are already facing unaffordable inflation. Analysts and industry representatives who would be affected by the new measures have warned that these taxes would result in a new wave of immediate price hike in the country. Therefore, it is difficult to see if inflation/prices would begin to come down any time soon.
The current expansionary policy is visible in the state of fiscal deficit during the tenure of PTI government. In the three completed fiscal years of PTI, the average annual fiscal deficit has been recorded over 8 percent as compared to 5.5 percent annual average during the five completed fiscal years of PMLN.
Trade Account Deficit:
The trade account (TA) deficit for first half of this fiscal year has been recorded at $25.5 billion, an unprecedented level never seen before in the country’s history. This gives an average of $4.25 billion per month, which is quite alarming. The TA deficit was higher by almost 100 percent compared to $13.2 billion for same period last fiscal year.
This astounding number is driven by imports, which were registered at $40.6 billion or an average of $6.8 billion per month. This is again an unprecedented level of imports, which hardly exceeded $5 billion in some isolated months. What is most alarming is that in the last two months (November -December 2020), imports were registered at $7.9 billion and $7.6 billion respectively. This is indicative of explosive growth in imports, and it is consistent with the massive expansion in demand engendered by high deficits and high growth in money supply.
The precarious state of external account has implications for country’s foreign reserves, exchange rate and foreign (external) public debt. Contrary to the much trumpeted narrative of retiring foreign debts of previous governments, the facts present completely a different picture. As on 30 June 2018, the external public debt was $70 billion which increased to $100 billion as on 30 Sep 2021, registering an increase of $30 billion during PTI government. On the other hand, the SBP reserves increased by only $9 billion in this period, compared to the level as on 30 June 2018, the remaining amount of $21 billion has gone in Balance of Payments (BOP)/Budgetary Support.
This increase in external debt doesn’t include the deposits of $5.5 billion received from Saudi Arabia, UAE and Qatar which have directly been booked in the Balance Sheet of State Bank of Pakistan (SBP) to suppress the true external debt figure. The most important point is that there is a net increase in external public debt of $30 billion in 39 months of the PTI government as opposed to their ridiculous claims of having retired the external debts of the previous governments.
Exchange Rate/Forex Reserves:
The exchange rate, which was Rs.152/$ in May 2021, when SBP reserves were around $15 billion. However, forex reserves rose to $20 in August 2021 yet the exchange rate jumped to Rs.178/$. The forex market paid no heed to Imran Khan’s statement (reported in the Business Recorder of 7 Dec 2021) that the true value of the Pak rupee (exchange rate) is Rs.163/$; the forex market simply refused to come down from Rs.178/$ range and can stay here or worsen after the availability of recent date (discussed above) about the trade and current account deficits. Therefore, this could exert yet another pressure on the prices/inflation.
If anything, and as we have discussed in the above paras, the pricing pressures (inflation) do not seem to be abating any time soon and therefore the exchange rate too would remain vulnerable till appropriate remedial measures are taken.
(The author, a UK Fellow Chartered Accountant, is former Federal Finance Minister and former Leader of Opposition in the Senate of Pakistan)
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