Adviser to the Prime Minister on Finance, Hafeez Sheikh, last week come out with another explanation of the government’s economic policies and the agreement with the International Monetary Fund (IMF). According to him, the economy is on the path to stability.
At a recent press conference, he pointed out that the current account deficit for the month of July 2019 had declined by over 70 percent as compared to July last year. As it is, the shrinking of the deficit is mainly due to two prior conditions of the IMF that were implemented by the State Bank of Pakistan (SBP): allowing a market-based exchange rate effective the middle of May and raising the discount to reach a positive real rate of return (in May and then again in July).
According to economic experts, the SBP has over-corrected in terms of these two policies as the rupee was undervalued while the discount rate was four to five percentage points positive as it was erroneously linked to the Consumer Price Index (13 percent projected for the entire year though estimated at around 11 percent in July) instead of core inflation (under 8 percent). As a result, these steps led to a massive decline in imports, including raw material and machinery imports with a major negative impact on private sector productivity and employment, while exports increased only marginally in dollar terms – 234 million dollars (from 1.636 billion dollars in July 2018 to 1.87 billion dollars in July 2019), though the percentage rise of around 14 percent is impressive. But that was due to the low base.
Hafeez Sheikh has also claimed success in raising revenue and said that around Rs4 billion to Rs5 billion additional amount had been generated from the increase in the number of filers from 1.9 to 2.5 million. But a target of 5.5 trillion rupees for the current year (with the growth rate projected at 2.4 percent) compared to the revised figure of 4 trillion rupees last year as revealed in the consolidated federal and provincial budgetary operations (instead of 4.39 trillion rupees estimated in the budget for 2019-20) is unrealistic, according to independent observers.
Contrary to the government’s claim of austerity, the budget documents do not show any figures indicating lowering of expenditure. To be sure, the government’s claim of reducing expenditure does not bear scrutiny. How can expenditure go down as the cabinet, including advisers and special assistants number the highest ever in the history of the country? The government has not explained what budgeted expenditures would be slashed, especially given the fact that current expenditure for the last year was estimated at 7 trillion rupees in the consolidated budgetary operations statement (as opposed to the much lower revised figure in the budget documents of 5.589 trillion rupees). In the current year, the government budgeted 7.2 trillion rupees for current expenditure which would have to be raised if social sector expenditure is to be doubled in line with Prime Minister Imran Khan’s vision. Subsidies have been budgeted to rise by around 16 billion rupees and a 200 billion rupee increase in development expenditure is envisaged.
As things stand today, non-tax revenue seems to be the only source of revenue that could be generated without burdening the taxpayers and the business community. But there is no official clarification as yet whether the one trillion rupee non-tax revenue is in addition to what is in the budget (894.4 billion rupees). According to the Finance Ministry, 300 billion rupees will come from the sale of two RLNG plants, while another 200 to 300 billion rupees is estimated from cellular licences. The SBP profit is estimated at 406 billion rupees in the budget. But the actual amount recovered or to be recovered still remains unclear. Needless to say, the discrepancies in the numbers point to weaknesses in gathering of information and faulty planning.
It is relevant to note in this context that the letter of intent submitted to the IMF signed by the Adviser and the SBP Governor indicates a total of 17.5 billion dollars from bilateral and multilateral sources excluding the Fund. This is an unprecedented high amount but it is not enough to meet the targeted budget deficit of 7.2 percent of GDP. Sukuk worth 300 billion rupees and borrowing from foreign commercial banks of 450 billion rupees have been mentioned in the budget while the actual amount would be adjusted as per the changing requirements mainly due to the disparity between the claims made in May to the IMF and the actual budgetary operations data for 2018-19 released recently. The latest reports show that the IMF is due to revisit the programme targets that were based on inaccurate data for 2018-19.