FeaturedNationalVolume 14 Issue # 13

Firefighting on the economic front

The January 23 mini-budget has diverse connotations for different sections of society. For the government, it is a reform package. The opposition believes it is an amnesty scheme to save Prime Minister Imran Khan’s sister Aleema Khan from her tax misdeclaration. Businesspeople think it a relief package, while economists consider it firefighting and the common people feel there is nothing for them.

Critics say the package, a third finance bill in the current fiscal year, is an amnesty scheme for defaulters and non-taxpayers. According to the government’s own admission, it will have to face a shortfall of Rs7 billion in revenues as a result of relief in the mini-budget. On the other hand, the Federal Board of Revenue (FBR) has estimated a revenue loss of Rs6.8 billion because of the relief measures taken by the government through the new bill at a time when the tax collection machinery already faced a shortfall of Rs158 billion in the first half (July-December) period of the current fiscal year.

In its reaction, the International Monetary Fund (IMF) asked Pakistan for taking more measures to increase the revenue collection on a short-term basis to stabilise the economy. IMF’s Resident Chief in Pakistan Teresa Daban Sanchez said, “Our understanding is that it includes a set of tax, administrative and regulatory measures aimed at lifting distortions that could foster private sector activities. Further measures are needed to increase revenue collection in the short term to support efforts to stabilise the economy,” she said in a statement. Moody’s – one of three big global credit rating agencies –termed the package positive for manufacturing and export-oriented sectors, which will lend much-needed support to enhancing the country’s foreign income and curb the current account deficit. It, however, noted the new budgetary measures had weakened the government’s income generation side as tax incentives awarded to industries and the agriculture sector further toughened the challenge of achieving the tax revenue collection target of Rs4.398 trillion. Accordingly, the budget deficit is expected to remain high. “While the mini-budget will bolster the export sector, there is a greater risk of fiscal slippage and slower fiscal consolidation in the absence of additional revenue-raising measures,” it added.

On the other hand, the State Bank of Pakistan (SBP) has projected that economic growth will slow down to 4-4.5pc in the current fiscal year as corrective measures taken so far to fix the fundamentals have taken a toll mainly on two leading sectors – large-scale manufacturing and agriculture. “The 6.2pc target for real GDP (gross domestic product) growth seems unachievable (in FY19),” the central bank said in its first-quarter report on the state of Pakistan’s economy for fiscal year 2018-19. “The country hit a 13-year high economic growth of 5.8pc in the previous fiscal year, but at the cost of widening macroeconomic imbalances as manifested in the five-year high fiscal deficit and a record high current account deficit. In fact, the large-scale manufacturing contracted for the first time in over seven years during Q1-FY19,” it noted.

Preliminary estimates indicate that production of all major Kharif crops has fallen, as compared to the last season. “The decline can be attributed primarily to an alarming water availability situation, particularly in Sindh, which led to a 7.7pc decline in the total area under production. Furthermore, crop yields also suffered due to subdued fertiliser offtake amidst rising prices of both urea and DAP. The uptrend in international oil prices during the first quarter remained a big challenge for the economy as it resulted in an unwanted growth in the oil import bill. Boosting foreign currency reserves and controlling inflation would remain the two near-term challenges to the economy,” the SBP said. Average inflation during Q1-FY19 increased to 5.6pc – the highest quarterly growth since Q1-FY15. The SBP projected inflation (Consumer Price Index) at 6.5-7.5pc for the full fiscal year against the target of 6pc.

In a significant blow to the common people, the Drug Regulatory Authority of Pakistan (DRAP) has announced up to 15pc hike in the prices of medicines with the approval of the government. According to a notification, a 9pc hike has been approved in the prices of life-saving drugs, whereas a 15pc hike was approved in the prices of all other medicines. Drug manufacturing companies had demanded a 40pc increase in the prices because of an increase in dollar’s value.

Inflation resurged to 7.2 per cent year-on-year in January, according to data released by the Pakistan Bureau of Statistics (PBS). The inflation has now crossed the four-year high of 6.78pc recorded in October last year — the period when global oil prices started declining. Inflation posted a marginal fall in November and December owing to a decline in prices of fresh vegetables and fruits in major urban centres. The government has projected 6pc annual inflation for the fiscal year, which the figure has already crossed in January. The average inflation was 3.92pc in FY18 and 4.16pc the year before. In January this year, food inflation increased by 2.4pc on an annual basis and 0.3pc on month-wise. Prices of non-perishable food items were up by 4.7pc, while those of perishable products fell by 16.6pc.

Furthermore, the impact of fuel prices was also felt on most food items, as retailers passed on the impact of higher transportation costs to consumers. The food items whose prices increased the most in January included tomatoes (27.55pc), garlic (22.83pc), sugar (6.15pc) and pulse moong (2.73pc). In the same category, prices of chicken declined by 18.06pc, potatoes by 15.01pc, peas by 11.36pc, lemons by 9.92pc, onions by 5.50pc, cabbage by 5.17pc and eggs by 1.27pc. On the other hand, non-food inflation went up 10.5pc and 1.4pc on yearly and monthly basis, respectively. In the non-food inflation, prices of electricity increased by 8.48pc, LPG by 5.95pc and house rent by 2.38pc. Prices of non-food items also remained under pressure on account of 10.04pc rise in the education index, followed by 7.17pc increase in clothing and footwear and 11.59pc in housing, water, electricity, gas and other fuels.

People also received hefty gas bills in January. The government, while announcing a gas tariff hike few months ago, had claimed it would not affect common households. But their gas bills have almost doubled. Houses, with two or more gas geysers, received over Rs10,000 bills. The consumers have received inflated bills but the government only allowed them to pay in installments, instead of charging them according to their use.

The recent tax incentives for the corporate sector and commercial importers aim to boost businesses, industrial output and expand domestic trade, but their results are not expected anytime soon. More incentives are expected for them, but the common people feel neglected. They have been overburdened with high prices of all essentials. Shopkeepers are overcharging at their will, but there is no mechanism by the government to check them. The price of naan and roti has surged to Rs12 from Rs10. The Rs2 increase may not be significant for the rich, but the poor feel its pinch hard, as they have large families to support. Thousands of people have lost their jobs in the last few months. Even staunch supporters of the government find it difficult to defend it. After the incentives for investors, the government should also announce a relief package for the common man by announcing subsidies on essential food items to mitigate their suffering.