Balancing growth with inflation control
For some time now, Pakistan’s economy has been a tightrope walk between growth promotion and inflation control. And in this year, when the government will struggle to meet its budget commitments to the International Monetary Fund, important public sector initiatives and expenditure deemed essential have been scaled back.
Despite positive projections for GDP growth and deflation of inflation, it remains skeptical whether these measures are strong enough to help end the suffering of the common public. In fact, the deepening pressures of cost-cutting on development programs as well as doubts over energy price hike were responsible for the failure of country’s economic policy to impress the analysts enough.
The International Monetary Fund estimated Pakistan’s growth rate at 3.2%, which coincides with the July 2024 estimation by Fitch Ratings that had budgeted at 3.6 percent but downgraded recently to between 3% and 3.5% by the government. Inflation is expected to be around 9.5 percent instead of the budgeted 12%.
Growth projections are mainly from a more robust performance in the agricultural sector that was up 3.6%. Still, such a level remains much lower than what was realized last year-in over 6% growth. According to the Finance Ministry, there are two indicators of such growth. They include the importation of agricultural machinery that grew by more than 100% compared to the last fiscal year. This will upgrade productivity. Credit for agriculture increased by 24%. However, two factors might postpone reaching the growth target: a 13.6% decline in urea offtake and a 21.9% fall in DAP fertilizer usage, plus lower cotton output, an important crop for the export textile sector
Industrial sector conditions are abysmal and the recent increase in electricity and fuel prices under IMF conditions are certainly not galvanizing. Although reduction rate has recently been scaled down, at 17.5% it still remains quite high and therefore, is associated with a consistent credit demand downtrend for large-scale manufacturing (LSM). Though sales of LSM have improved, this is primarily because of sale inventory rather than an increase in output as growth of LSM has gone into positive territory at 2.4% against last year’s contraction of 5.4%.
Government spending remains the engine of the economy in terms of growth, but indeed their current spending will increase by 21% for 2024-25 compared to last year, heavily relying on both domestic and international borrowing.
On the revenues side, the government plans to increase its tax burden on the existing taxpayers. This has led to enormous levels of low- to middle-income earners in poverty and vulnerability, estimated to have risen to 41% of the population. The base is being expanded to include the traders; the revenue from the latter is, however, a meagre 50 billion rupees for this fiscal.
The Public Sector Development Programme, traditionally a keystone in fostering economic vitality and enlarging job prospects, has to suffer severe cutbacks again this year. This pro-growth expenditure, with inherent potential to stimulate employment, is being cut back horrendously to achieve the fiscal deficit target negotiated with the Fund.
Fitch Ratings forecast it would ease to 6.2 percent by December. The MPC, in a statement released on September 13, 2024 attributed this trend to downward pressure to the controlled demand buoyed by improved supplies of key food items, favorable global commodity prices and postponed increases in regulated energy prices.
The MPC also noted that “consumer inflation expectations have intensified, a sentiment justified by the continued uncertainties with regards to future administered energy price hikes, global commodity price fluctuations, and additional tax measures necessary to eliminate revenue deficits.”.
There is skepticism attached to the inflation data, which is notoriously low and most people feel is actually underestimated. This is largely because Utility Stores’ prices – the kind of entity whose bulk is set by the government – are included in the inflation survey. Utility Stores have been set up to provide essential goods on subsidized rates, but it often ends up short in stock either in terms of quality or demand. However, there are further inconsistencies on some areas: though cement rates have softened, construction tariffs haven’t budged. Besides, the obvious reason, the government’s ever-increasing reliance on borrowing to meet current expenditures – inherently an inflationary way of financing – is not considered in official inflation measures.
It does little to alter a basic concern for economic policymakers who have committed to the conditions imposed by the IMF for financial support from some allied nations-the reported GDP growth and easing inflation.
As energy prices are likely to go even higher, and especially with tax measures as prescribed in the contingency agreement agreed upon with the IMF looming, along with the first-quarter shortfall in revenues, there is always the underpinning of mounting public dissatisfaction. In a heightened scenario of growing discontent, it can set off far-reaching political and economic consequences. It is therefore important that the government remains attuned to this latent unrest which is hard to suppress by means of the restrictive or repressive apparatus.
Such is the situation with Pakistan as it navigates the course to economic stability while under the watchful eye of the IMF, its growth challenges are significant as it tries to balance growth against the controlling of inflation and the public discontent. High energy prices and potential contingency tax measures will further stretch the public at this juncture when revenue collections in the first quarter fall far short of targets. The policymakers moving forward should be aware of the brewing discontent and socio-economic implications that tight fiscal measures carry. It may be crucial for incremental, balanced steps in addressing the needs of the people with the economic goals to serve as the cornerstone of sustainable progress going forward.