FeaturedNationalVOLUME 19 ISSUE # 29

Economic strain and prospects

In the face of substantial fiscal challenges, Pakistan’s economic trajectory is navigating through turbulent waters. The Finance Ministry has reported considerable pressure on expenditures, primarily due to escalating interest payments. This fiscal strain has significantly impacted credit availability to the private sector, plummeting by 39.7%.

Amid these financial dynamics, the Economic Adviser Wing of the Finance Division provides a detailed Monthly Economic Update and Outlook for May 2024, shedding light on various economic sectors and their performance indicators. The Finance Ministry has indicated that expenditures are enduring substantial strain due to escalating interest payments, which undoubtedly have contributed to a 39.7% decline in credit to the private sector. It observed a 39.7% contraction in private sector credit to Rs77 billion from 1st July to 3rd May of the current fiscal year, compared to Rs127.6 billion during the same period last fiscal year. This phenomenon might also explain the negative 0.10% large-scale manufacturing (LSM) growth from July to March 2023-24. Revenue did see an uptick, yet expenditures remained heavily pressured by rising mark-up payments.

Agriculture has emerged as a primary catalyst for economic expansion in the current fiscal year, boasting a 6.25% growth. The sector’s resurgence is primarily due to government measures enhancing input supply and amplifying credit distribution to farmers. From July to April 2024, the agricultural input scenario remained optimistic, with farm tractor production and sales surging by 54.8% and 56.6%, respectively, and a 33.8% increase in agricultural credit disbursement during July-March 2024.

However, fertilizer usage displayed a mixed trend in April 2024, with urea offtake decreasing by 19.7% while DAP offtake surged by 82.5%. The update emphasized that targeted subsidies will be pivotal in addressing the financial challenges farmers face throughout the seasons. Incentives provided by federal and provincial governments, including the Kissan card scheme, are favorable for agriculture-driven economic growth, with the initial input conditions suggesting a promising output compared to the previous year’s Kharif production.

The inflation outlook for May is on a downward trend, attributed to the elevated inflation levels of the preceding year and enhancements in the domestic supply chain of perishable goods. The report projects that inflation will likely remain within the 13.5-14.5% range for May. The fiscal deficit for July-March 2024 was recorded at 3.7% of GDP, while the primary balance showed a surplus of 1.5% of GDP. Total expenditures surged by 36.6% to Rs13,682.8 billion from Rs10,016.9 billion during the same period last year, largely driven by a 54% increase in mark-up spending.

According to the report, remittances grew by 3.5% to $23.8 billion during July-April 2023-24, compared to $23 billion for the same period the previous year. Exports increased by 10.6% to $25.7 billion from $23.2 billion, imports decreased by 5.3% to $43.4 billion from $45.8 billion, and the current account deficit plummeted by 94.8% to $0.2 billion from $3.9 billion. Foreign Direct Investment (FDI) rose by 8.1% to $1457.9 million from $1348.8 million.

Revenue from the Federal Board of Revenue (FBR) during July-April increased by 30.6% to Rs7,362 billion from Rs5,638 billion, while non-tax revenue soared by 94.8% to Rs2,417 billion during July-March 2024 from Rs1,241 billion during the same period the previous year. Federal Public Sector Development Program (PSDP) expenditures decreased by 2.2% to Rs322 billion from Rs329 billion during the review period, while the fiscal deficit widened by 26.8% to Rs3,902 billion during July-March 2023-24 from Rs3,079 billion the previous year, and the primary balance increased to Rs1,615.4 billion from Rs503.8 billion.

Inexplicably, the update did not include the GDP growth rate, which has been available on the Pakistan Bureau of Statistics (PBS) website since May 21. The PBS claims that the economy experienced an upward revision in growth for the first two quarters—from 2.5% in July-September to 2.71%, and from 1% in October-December to 1.79%. The third quarter, according to the PBS, registered a 2.09% growth, projecting an overall 2.38% growth for the year. Assuming the upward revision of the first two quarters in May was valid, the question of seasonality arises, particularly as the Update acknowledges agriculture as the main driver of growth, registering a 6.25% increase.

The report further contends that this growth was bolstered by an enhanced supply of inputs—evident in tractor sales which surged by 56.6%—and an increase in credit disbursement, rising by 33.8% to farmers. These inputs and credit were presumably allocated to major crops, which notably contribute only 5.4% to the total GDP. The principal beneficiaries of government generosity, however, were the affluent and above-subsistence level farmers.

Large-scale manufacturing (LSM) experienced a growth spurt, despite a 39.7% decline in credit as government borrowing crowded out the private sector. This sector turned positive and is expected to maintain moderate positivity throughout the latter half of the current fiscal year. However, what “moderately positive” entails is not clarified. It is essential to note that while the July-March LSM is at -0.1%, this is an improvement from the -6.99% recorded in the comparable period of the previous year—a reduction in negativity attributable to the low base of fiscal year 2022-23.

Independent economists highlight rising unemployment, estimated at 10%, alongside factory closures and 40% poverty rates, suggesting that LSM growth is purely sales-driven. The report indicates that the Consumer Price Index (CPI) fell to 17.3% in April this year from 36.4% in April last year, though the average figures for July-March over the two years are quite similar: 26% this year versus 28.2% last year.

The public remains unimpressed, as the high rate of inflation persists. Independent economists dispute the lower rate, arguing that the Pakistan Bureau of Statistics (PBS) uses the lowest subsidized electricity tariff rather than the average, and considers government-subsidized prices at Utility Stores Corporation, where availability is not always guaranteed.

As always, the report overlooks the government’s role in inflation by borrowing heavily from domestic commercial banks to fund its current expenditures. According to the report, “higher expenditures have been observed on the back of a 33.4% increase in current expenditures during July-March 2024, primarily due to a 54% increase in markup spending,” which has expanded the budget deficit, another inflation driver.

Stabilization is evident in the external sector, with remittances marginally increasing to $23.8 billion from $23 billion during July-April 2024. The current account deficit has contracted by 94.8%, with exports rising slightly to $25.7 billion from $23.2 billion and imports decreasing from $45.8 billion to $43.4 billion.

Foreign exchange reserves have grown to $9 billion, largely due to rollovers that must be repaid with interest to friendly countries. Pakistani authorities remain optimistic about foreign investment inflows, with FDI rising to $1,457.9 million from $1,348.8 million over the same period last year. Thus, if stabilization is narrowly defined with only the external sector in mind, Pakistan’s position has indeed improved, albeit with borrowed funds as the primary stabilizer. With the budget set to be presented to parliament next week, one would hope that the Update urges economic policymakers to consider reducing current expenditures, especially those funded through borrowing, and to implement reforms in two notably underperforming areas: ending the tariff equalization subsidy for the power sector before privatization and broadening the tax base.

The intricate dance of economic indicators paints a complex picture of Pakistan’s fiscal health. While there are pockets of growth, particularly in the agriculture sector, and signs of stabilization in the external sector, the overarching narrative is one of cautious optimism marred by significant challenges. The persistent high inflation, burgeoning fiscal deficit, and heavy reliance on borrowed funds underscore the need for prudent economic management. As the government prepares to present the new budget, it is imperative that policymakers focus on reducing current expenditures and implementing critical reforms to ensure sustainable economic growth. Addressing these issues head-on will be crucial in steering Pakistan towards a more stable and prosperous future.