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Good vs bad news on economic front

There is undoubtedly good news on the economic front on two counts notably the continued positive current account deficit and the upswing in productivity associated with the manufacturing sector.

But the good news is accompanied by sturdy seeds of some bad news to come based on the government’s own data/analysis. Thus while the current account remained in surplus July-December 2021 at 997 million dollars (excluding official transfers) against negative 2.32 billion dollars in the comparable period of the year before – data that the economic team leaders Dr Hafeez Sheikh and Dr Reza Baqir have very successfully focused the Prime Minister’s attention on to the exclusion of the seeds of impending bad news – yet the far from positive performance of two of the major current account components continue to be a source of concern: (i) imports have again begun to rise – from 22.1 billion dollars in July-December 2019-20 to 23.2 billion dollars in July-December 2020-21; and (ii) exports declined from 12.1 billion dollars July-December 2019-20 to 11.8 billion dollars July-December 2020-21 and though exports have improved in recent months yet the increase as noted by the International Monetary Fund (IMF) in its most recent press release is “mild”.

The third major component of the current account, remittances, has shown a consistent improvement contrary to earlier forecasts by international donor agencies. On average remittances from official channels as opposed to through the illegal hundi/hawala system (that virtually ceased during the pandemic related lockdown) amounted to an impressive more than 2 billion dollars a month this year with the credit claimed: (i) indirectly by the Prime Minister as reflective of the overseas Pakistanis support for his administration; and (ii) directly by the Governor State Bank of Pakistan (SBP) for the numerous remittance initiatives launched by the Bank; in addition Dr Reza Baqir maintains that the trend will continue as the remitters, satisfied with the official channels, would have no reason to revert back to the hundi/hawala system.

The SBP conducted a survey (concluded on 9 January 2021) on remitters and the recipients. The survey noted that it would only “be utilized as input for policy making to increase facilitation in remittances through banking channels” with the results perhaps still being compiled and so far not made public. One would however hope that the unskilled remitters and the recipients had the capacity to fill out the survey on their own failing which they were not susceptible to responding positively if the survey was carried out by the remitting bank’s staff. Be that as it may, remittance inflows through official channels have risen dramatically during the pandemic – be it due to external factors or policy related – and it is critical for this trend to be sustained if the balance of payment deficit is to remain a positive feature of our economy.

Manufacturing output is on the rise with export orders rising, or so reveals government claims and data; however this claim needs to be reconciled with the projected growth rate by the IMF.

Or in other words, the bad news, undiluted by any positive trend, is that the growth rate has been downgraded to 1.5 percent by the IMF in its 16 February 2021 end of mission press release titled “IMF Staff and Pakistan Reach Staff-Level Agreement on the Pending Reviews Under the Extended Fund Facility” as opposed to the budgeted 2.1 percent for 2020-21 – the same rate projected by the Fund for 2019-20 which was on the back of severe contractionary fiscal and monetary policies agreed by Pakistan’s economic team leaders raising the specter of the implementation of the same policies in weeks/months to come. Notwithstanding the lack of specific time-bound conditions and structural benchmarks agreed in the second to fifth reviews, which would be uploaded on the Fund website as and when its Board approves the staff level agreement, a prerequisite to the 500 million dollar tranche release, the statement does indicate that contractionary policies are to continue.

With respect to fiscal policy the press release notes that “the fiscal strategy remains anchored by the sustainable primary deficit of fiscal year 2021 budget and allows for higher than expected Covid-related and social and social spending to minimize the short term impact on growth and the most vulnerable.” The primary deficit target (excluding interest payments on government borrowing and repayment of principal as and when due) has not been made public by Pakistan’s economic team leaders (either through a statement or in the budget documents) however sources in the Ministry of Finance did reveal a few months ago that 0.5 percent of Gross Domestic Product (GDP) was proposed under IMF pressure (against 0.8 percent pre-Covid19 target noted in April 2020 on the IMF website titled Request for Purchase Under the Rapid Financing Instrument with the projection post-Covid-19 given at negative 0.3 percent).

Thus the Fund has revised the primary deficit target from negative 0.3 in April to positive 0.5 percent nine months later. The revision may well be because of the changing perception as to the actual impact of Covid-19 on Pakistan’s economy that may partly be based on the glowing self-congratulatory reports by Cabinet members on their management of Covid-19 though the Fund did note in its recent press release that “the outlook is subject to a high level of uncertainty and downside risks;” or perhaps on data that was rationalized during discussions with the IMF though not publicly as there are significant discrepancies in 2019-20 data – given the revised estimates included in the budget documents and the provisional data released for the past year in August 2020.

Be that as it may, the primary deficit target is a matter of serious concern on two counts. First the economic team has shown a penchant for heavy borrowing domestically with (i) total domestic debt rising from 16.5 trillion rupees in August 2018 to a whopping 23.7 trillion rupees by September 2020 (a historic rise) while (ii) external debt has also risen though it remains understated as liabilities incurred due to swap arrangements from mainly China and commercial banks abroad has reached another historic high of 9 billion rupees (not noted as liabilities by the SBP). And given that Pakistan’s economic team noted that pre-Covid19 it would require a total of 38.5 billion dollar external financing for just 39 months in its first letter of intent submitted to the Fund in May-June 2020 one would have hoped that the focus of the Fund had shifted to the budget deficit.

And second, this primary deficit target would put pressure on the economic team to: (i) achieve the 4.9 trillion rupee budgeted tax revenue target, that sources in the Federal Board of Revenue maintained at the time of the budget was unrealistic even at the projected 2.1 percent growth and would be all the more difficult to achieve with the 1.5 percent growth rate; (ii) fuel federal provincial mistrust, especially those provinces where the PTI is not in government, as the centre raises reliance on those taxes that are not part of the divisible pool notably the petroleum levy with severe implications on input costs and on the pocketbook of the poor relative to the rich as it is a regressive tax; (iii) reliance on non-tax revenue, particularly privatisation, would rise and is already reflected by pressure on Privatisation Commission to expedite/fast track the process for which the climate does not exist both in terms of rising worker resistance and in the capital market; (iv) in 2019-20 the government relied on State Bank of Pakistan profits which reached an unprecedented high of 1.163 trillion rupees which as per a SBP release was “aided by stable exchange rate, compared with the net loss of 1.043 billion rupees during the previous year….on the back of high interest rate prevalent in the first three quarters of the year allowed the bank to accrue significant amount of interest income from the interest sensitive assets, particularly lending to the government and income from the bank’s open market operations.” The rate for the first three quarters of 2019-20 was 13.25 percent or just under double the 7 percent prevalent in the current year. In other words, SBP profits cannot be relied on in the current year to meet the budget deficit target unless of course the rate rises which in turn would throttle economic activity like in 2019-20.

A widening budget deficit gap may be the reason why the IMF has projected inflation at 8. 8 percent, instead of the 6.5 percent budgeted by the government.

The IMF press release also warns the SBP that “it will be important for the State Bank of Pakistan to continue to remain vigilant and prevent possible financial stability stress as the temporary support is phased out” – temporary support post-Covid-19 including the 7 percent discount rate and a rupee value that appears to be exiting from the under-valuation of recent months as well as fiscal incentives, including lower utility rates extended to the export sector.

So does the good news outweigh the bad for the general public with respect to IMF re-engagement on the programme? Most definitely, with containment of the growth rate and a widening budget deficit that would impact on employment opportunities and inflation. To simply rely on the Ehsaas programme, 200 billion rupees for the current year, to cater to the poor and the vulnerable is not sufficient to meet the growing numbers being pushed below the poverty line.

To conclude, few argue against Ishaq Dar’s significant contribution to the decline in PML-N’s political fortunes in 2018 elections. One hopes that Prime Minister Imran Khan takes cognizance of this and appoints a party loyalist with relevant experience, Asad Umer does meet these requirements, to sit in on future negotiations with the IMF to ensure that the voice of the general public that voted him to power is heard loud and clear.

Anjum Ibrahim, "Good vs bad news on economic front," Business Reorder. 2021-02-22.
Keywords: Economics , Economic growth , Economic front , Economic team , State Bank , Reza Baqir , IMF , PTI

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