As the country enters 2022, it is deficit, deficit all the way and the government follows
The national economy suffers from a chronic disease — DEFICITESE. It is home-grown and its spread cannot be contained because there is no will for it. The most important deficit is the growth deficit.
With a high growth rate of population, the country requires a sustained growth of 7-8 percent in the GDP to feed it and employ the addition to the labour force. It was only 3.94 percent in fiscal year (FY) 21 that included the first six months of 2021. For the remaining six months we have to rely on the partially available data.
In October, the growth of the large-scale manufacturing industries (LSMI), the sector projected by the Planning Commission to lead growth, declined by 1.19 percent. For the July-October period as a whole, it was 3.56 percent.
Exports continue to grow, 32.8 percent in November and 26.7 percent during July-November. The achievement is accompanied by 69.2 percent increase in imports, contributing massively to another deficit—the trade deficit. As the gas shortage extends to the textile sector, this over-incentivised activity is also likely to slow down.
In the agriculture sector, cotton output is expected to post a growth of 32.8 percent and wheat production is being targetted at 28.9 million tonnes. A sudden shortage of fertilisers is affecting the sowing and raising the spectre of a food deficit. No wonder, multilateral agencies and think-tanks are forecasting a growth rate less than the official target of 4.8 percent. So, the calendar year 2021 is likely to close on a continuing growth deficit.
The root cause of the growth deficit is a persistent deficit in investment. For the desired rate of GDP growth, the desired rate of investment is around 25 percent of the GDP. In FY21, it was 15.2 percent, lower than 15.3 percent in the previous year as well as the target of 15.5 percent. In this background, the target set for the current fiscal year at 16 percent is nothing but an unrealisable ambition.
There is, in fact, a long-term decline in the rate of investment. In the 1980s, it averaged 18.6 percent of the GDP per annum. By 2010s, the average had declined to 15.5 percent, incidentally the target for 2021-22. Over the same period, Bangladesh’s rate of investment jumped from 16.1 percent to 29.1 percent. So did her growth rate, from 3.5 percent to 6.8 percent.
Next is the savings deficit. Even the dismally low rate of investment, i.e., 15.2 percent, is not financed by a reasonable rate of domestic savings. Its contribution was a miserable 5.8 percentage points. The major share of 9.5 percentage points was supported by net factor income from abroad, preponderantly remittances by overseas Pakistanis. The total, defined as national savings, exceeded the investment by 0.1 percentage point because FY21 experienced something unusual, a negative net external resource inflow of 0.1 percent or a current account surplus.
Normally, there is a huge current account deficit. The norm had resumed by May, with FY21 posting an overall current account deficit of $1.9 billion. This was the lowest level of deficit in ten years. It resulted from a Covid-related surge in remittances. Export receipts increased by 13.7 percent, but import payments rose by 23.3 percent.
The PTI government has kept delaying the compliance report. Elected on a plank of human development, it has not fulfilled the constitutional requirement of reporting annually to the parliament on the progress made on the principles of policy.
The information available so far for FY22 suggests not just a resumption of the traditionally high trade and current account deficits, but far worse. In the Annual Plan 2021-22, the target fixed for current account deficit was $2,276 million. In the first five months, the deficit has reached $7,066 million. Import of goods is more than twice that of exports and the export of services is 67.3 percent of imports.
Then there is the so-called mother of all deficits, the fiscal deficit. In FY21, it stood at 7.1 percent of the GDP. The Ministry of Finance targetted to reduce it to 6.3 percent during FY22. In the first quarter, the ministry estimated that the total revenue rose at 22.3 percent, which was significantly higher than the 14.5 percent increase in expenditure.
Going by the accelerated tax collection by the FBR for the first five months of FY22, the target seems achievable. Thus far, the collection of Rs 2.3 trillion is in excess of the target by Rs 298 billion. In the main, the addition is the result of higher imports, a rapidly rising dollar and inflation approaching double digit, rather than the pursuit of reform.
In spite of this, the State Bank projects a deficit in the range of 6.3-7.3 percent. It finds non-tax revenue reduced due to a lower petroleum development levy and development spending, subsidies and grants increased significantly. This is where the IMF-prescribed mini budget comes in to increase revenue by reducing tax exemptions worth Rs 350 billion and a reduction of Rs 200 billion in the development programme.
Before the IMF medicine is administered, inflation has risen beyond expectations. In November, the Consumer Price Index (CPI) increased by 11.5 percent, the Wholesale Price Index (WPI) rose by 27 percent and the Sensitive Price Indicator (SPI) by 18.1 percent. For the week ended on November 16, the overall SPI was 19.5 percent and for the lowest income quintile, it had shot up to 21.4 percent.
Inflation is expected to continue to gather momentum as the IMF noose is tightened around the neck of the economy. Contrary to the State Bank’s expectation of a moderating demand, the economy is likely to see a decelerating growth.
A “deficit-rich” economy is obviously a highly indebted economy. As percent of the GDP, total debt and liabilities stood at 100.3 in June 2021. This was a significantly reduced burden from 107.3 in June 2020. By September 2021, the ratio was 93.7 percent compared to 94 percent in September 2021. Out of this, the total external debt and liabilities were 40.2 percent. The total debt of the government, as defined in the Fiscal Responsibility and Debt Limitation Act (FRDL) was 69 percent of the GDP in September this year, down from 70.7 percent a year ago, but still above the required 60 percent that was to be achieved by end June 2018.
The major explanation is that the fiscal deficit remains above the 4 percent of the GDP stipulated by the FRDL. The PML(N) government had amended this law to suit its profligacy. The worst part of the amendment was to delete the condition of doubling the expenditure on health and education.
For its part, the PTI government has kept delaying the compliance report. Elected on a plank of human development, it has not fulfilled the constitutional requirement of reporting annually to the parliament on the progress made on the principles of policy.
The year 2021 started with government spokespersons spreading optimism that, at long last, the economy was not only out of the woods but it had finally broken away from its perpetual boom and bust cycle. However, as the country enters 2022, it is deficit, deficit all the way and the government follows.
The writer is a senior political economist and president of the Council of Social Sciences (COSS), Pakistan.