NationalVOLUME 16 ISSUE # 10

Economic recovery and the challenge of price hike

Though still beset with many problems, yet the national economy is showing signs of recovery. The Pakistan Tehreek-i-Insaf (PTI) government inherited an economy in serious trouble.

The major challenges were a heavy foreign debt of more than US $ 90 billion, a large current account deficit of above US $ 20 billion, a wide budget deficit of 6.6pc of the GDP, and a large amount of total public debt equal to 70pc of the GDP, which was 10pc higher than the limit (60pc) set in the Fiscal Responsibility and Debt Limitation Act (FRDLA) 2005, amended in 2017. The exchange rate stood at Rs. 121.00 per one US dollar, while the foreign exchange reserves held by the State Bank of Pakistan (SBP) were US $ 12 billion. An annual amount of 7 billion dollars was required to repay foreign debt instalments and interest charges.

It was an extremely difficult situation that needed prompt remedial action. In order to pay back the foreign debt instalments and build up a reasonable foreign exchange reserves to pay for the necessary imports, the PTI government negotiated loans worth US $ 7 billion from the friendly countries and US $ 6 billion from the International Monetary Fund (IMF).

The PTI government has also succeeded in stabilizing the value of the rupee and correcting the negative current account balance. The foreign exchange reserves have been buttressed by reducing the import of non-essential goods and increasing exports to which end many incentives have been provided to the industrial sector.

A substantial increase in workers’ remittances, growth in export earnings, and lower import payments have helped ensure budgetary stability, a key element in economic growth. The fiscal deficit narrowed to 8.1 percent of the GDP from 9.0 percent in FY19. Total revenues rose to 15.3 percent of the GDP due to higher non-tax revenue, as the central bank and the telecommunication authority repatriated large profits. At the same time, the government has provided a slew of China-Pakistan Economic Corridor (CPEC)-related and other incentives to the foreign investors to boost foreign direct investment (FDI).

Low revenue collection is among the biggest challenges to the national economy. Steps have been taken to reform the Federal Bureau of Revenue (FBR) in order to broaden the tax base and improve the tax collection which is essential to reduce the budget deficit. Efforts have also been made to limit the circular debt in the power sector by signing fresh accords with the private electricity producing companies which were allowed undue concession by the previous governments. To meet power shortages, work has been started to build new dams, hydropower and other power projects. A major initiative of the present government is to boost the construction industry which will have a salutary effect on about 40 downstream industries.

When seen in the context of the coronavirus epidemic and the Opposition’s obstructionist politics, these achievements become more impressive. The epidemic slowed down economic activities, affected revenue generation and worsened the employment situation. But the government must be credited for moving quickly to provide financial support to the poor families, whose earning members had lost their jobs due to the lockdowns.

No wonder, with most of the major economic indicators turning positive, the international financial institutions have also taken notice of the revival of Pakistan’s economy. An IMF Mission, led by regional chief Ernesto Ramirez Rigo, recently said that Pakistan has made considerable progress in advancing reforms and implementing sound economic policies. Rigo said that inflation should start to see a declining trend as the pass-through of exchange rate depreciation has been absorbed and supply-side constraints appear to be temporary.

As per the latest World Bank’s assessment of Pakistan’s economy, the balance of payments improved to a surplus of 2.0 percent of the GDP in FY20, and official foreign reserves increased to US$13.7 billion at end-June 2020, which is sufficient to finance 3.2 months of imports.

In the opinion of independent economists, by and large, the government has done well on the economic front, but tough challenges still remain. Price control should be the No. 1 priority of the government now. Constantly rising prices of flour, sugar, pulses, vegetables and fruit have hit the common man hard and upset the household budget of all classes. As it is, rising prices are mostly the result of market manipulation by hoarders and black marketers. It is time the government came down hard on price sharks. The best way to go about the task would be to set up price monitoring and control committees in every locality composed of people’s representatives whose job will be to keep a watch on the prices of essential commodities.