FeaturedNationalVOLUME 19 ISSUE # 17

Economic challenges and realities

In the intricate landscape of economic governance, the new government faces formidable challenges in meeting the stringent conditions for the final release of the IMF tranche.

The upcoming government faces a daunting challenge in meeting the stringent prerequisites for the final release of the IMF tranche, which may badly impact the common people, who are already facing the worst periods of inflation in the country’s history. The economic impasse can only be resolved by implementing structural reforms, a move consistently resisted by previous political administrations.

The new government’s task is made even more challenging by the increased size of the Ramazan package by the new Punjab government. This decision may be based on a lack of awareness that the Punjab caretakers had committed to reducing the Rs115 billion overspend from the previous year, aiming for budget neutrality. Despite this, the sole solution to the current economic deadlock lies in embracing structural reforms, a measure opposed by all political governments thus far.

The Economic Update and Outlook for February 2024 presented a notable disparity between analysis and statistical data. For instance, the report claimed that the caretaker government took measures to reduce unproductive expenditure. However, data at the report’s conclusion revealed a 5.9 percent decline in the Public Sector Development Programme during the first half of the current year compared to the previous year. Surprisingly, the fiscal deficit increased by 4.3 percent, primarily fueled by a rise in budgeted current expenditure.

Additionally, the report noted the caretaker government’s efforts to boost tax and non-tax income, with FBR revenue rising by 29.8 percent and non-tax revenue by 116.5 percent in the first half of the year. However, the report failed to acknowledge that the actual inflation rate of 28.7 percent (July-January) exceeded the budgeted 21 percent, impacting tax collections. Although the caretakers proposed FBR reforms, these were deferred by the Election Commission of Pakistan to the next elected government, and the reforms mainly focused on administrative changes rather than restructuring the tax system.

The report also highlighted a positive trend in large-scale manufacturing (LSM) activity since April 2023. LSM increased by 3.54 percent in December 2023, and month-on-month growth reached 15.7 percent from July to December 2023. However, the analysis overlooked the fact that LSM remained in negative territory (negative 0.40), albeit with a reduction from the previous year’s comparable period (negative 2.10).

Exports experienced a 9.3 percent rise from July to January 2023 compared to the same period the previous year. However, this increase was attributed not to a surge in volume but to the higher international prices of exported items. Furthermore, during Dar’s tenure, from end September 2022 until the conclusion of the Shehbaz Sharif-led government, his decision to artificially control the rupee-dollar parity resulted in multiple exchange rates, contributing to lower-than-projected exports in the preceding year.

Two critical indicators directly affecting the general public depicted a deteriorating trend. Inflation averaged 28.7 percent compared to 25.4 percent the previous year. While caretakers attributed this to the conditions agreed upon with the IMF in the ongoing Stand-By Arrangement, they overlooked the heavier-than-budgeted reliance on domestic borrowing for current expenditure. This, in turn, led to a higher-than-budgeted deficit, fueling inflation.

Although the current account deficit saw a substantial 71.2 percent decline, it was primarily due to import restrictions. The Fund acknowledged that these restrictions might cease by the program’s end in April 2024, rather than any significant increase in export volume. Remittances continued their downward trajectory, dropping from 16.3 billion dollars in July-January 2022-23 to 15.8 billion dollars in the corresponding period this year.

Reserves increased to 7.9 billion dollars on February 27, 2024, compared to 5.4 billion dollars on the same day last year. However, it’s important to note that Dar’s flawed policies were responsible for the cessation of all pledged assistance from multilaterals and bilaterals. Additionally, the rise in reserves reflects incurred debt rather than any improvement in the country’s earning capacity in dollar terms.

The caretakers’ claim of placing the economy on the path to stabilization is confined to the successful completion of the first review under the SBA, with no discernible improvement in key macroeconomic indicators.

As we dissect the economic scenario under caretaker governance, a mixed bag of successes and challenges emerges. Despite a commendable reduction in the current account deficit, the decline is attributed to import restrictions rather than a robust surge in exports. Inflationary pressures, exacerbated by domestic borrowing, underscore the need for strategic fiscal management. Remittances and reserves paint a contrasting picture, reflecting the aftermath of past policies. While the caretakers claim progress in stabilizing the economy, the real test lies in sustained improvements in key macroeconomic indicators, signaling a path towards enduring economic resilience.