FeaturedNationalVOLUME 15 ISSUE # 05

In the middle of economic crisis

A recent report by the United Nations says Pakistan’s economic crisis has not been resolved despite support from China and Saudi Arabia and a large International Monetary Fund loan. The assessment is contrary to tall claims of the government that economic woes of the country are over and better days will come soon.

Pakistan’s major challenges are stabilisation and protection of the economy against external risks, rising global prices, current account deficit, rising debt servicing, and continued losses of public sector enterprise. Missed revenue collection is compounding the problem. The Federal Board of Revenue (FBR) has missed the revenue collection target for the first quarter of the current fiscal year by a large margin of Rs111b against the target of Rs1,071b despite several measures and double-digit consumer inflation. The revenue shortfall is constantly increasing with each passing month starting from Rs14b in July to Rs47b in September — last month of the first quarter.

Pakistan’s economy is forecast to slow down further and its GDP growth target is expected to de-accelerate to 2.8pc for FY20 in the wake of sizable fiscal and external balances. According to the Asian Development Bank, Pakistan’s fiscal adjustments will suppress domestic demand, and demand contraction would keep growth in the manufacturing sector subdued. The ADB’s “Asian Development Outlook 2019 Update” forecast Pakistan’s GDP growth slowing from 5.5pc in FY18 to 3.3pc in FY19, lower than its forecast of 3.9pc. The ADB update estimates the FY20 budget deficit to clock in at 7.2pc of GDP – 1.7 percentage points lower than the deficit in FY18.

Pakistan’s financing needs are likely to be met through funds from external and non-bank sources after government discontinued borrowing from the central bank. Further, resource allocation indicates a shift towards external borrowing, with net external financing estimated at Rs1.8 trillion or 4.2pc of GDP. Financing from non-bank sources is projected at Rs833b or 1.9pc of GDP. Expenditure in FY20 is expected to reach 23.8pc of GDP with increase of 1.8 percentage points in current spending to cover larger interest payments and higher allocations for social spending to avoid hurting the poor as reform progresses, according to the outlook.

The ADB report says import payments will remain subdued, reflecting weak economic activity and the pass-through of past rupee depreciation against dollar. The real effective exchange rate is now thought to be near equilibrium, and a lower and more stable rupee is expected to improve export competitiveness. Foreign capital inflows are likely to increase whereas foreign direct investment should revive as investors’ confidence restores with implementation of IMF’s stabilisation and reform programme. This should also help bring additional finance from multilateral institutions and other international partners. Along with the activation of a Saudi oil facility with potential disbursements of $1b in the current fiscal year, these developments are expected to raise foreign exchange reserves to reach more than $10b by the end of FY20.

On the other hand, the “Trade and Development Report 2019” released by the United Nations says, “Pakistan is in the midst of a crisis” as the growth rate has halved, the balance of payments is in poor shape, the rupee has depreciated significantly and external debt is large and rising. The slowdown observed in the rate of growth of the Chinese economy from 2017 onwards, is projected to intensify in 2019 because of the trade and technology tensions. The slowing of China’s trade growth has a major impact on other East Asian and South-East Asian economies, since it is likely that the integrated value chains spread across these economies and linked to China would be disrupted, it observed.

On the other hand, inflation, which hurts the common people hard, has surged by 11.4pc year-on-year in September, reported the Pakistan Bureau of Statistics (PBS). Inflation, measured through the Consumer Price Index (CPI), edged up by 0.77pc over the previous month after the PBS revised its calculation methodology. Based on the new base year (2015-16), September inflation came in at 11.37pc, against 10.49pc in the previous month. Going by the old base year of FY08 that was being used until two months ago, the key inflation index comes in at 12.55pc for September, showing a 0.92pc increase over the month of August. As per the new base year, the lowest CPI was recorded in July at 8.4pc which grew to 11.37pc in September.

The International Monetary Fund has estimated that Pakistan’s inflation may escalate up to 13pc. However, the government’s estimate is around 11pc, which has already been crossed. Food inflation in urban areas rose by 15pc in September on a yearly basis and 2pc month-wise. In rural areas, food inflation rose by 15pc on yearly and 1.8pc on monthly basis. Similarly, non-food inflation in urban centres was recorded at 9.7pc year-on-year while in rural areas it was 8pc.

According to Asian Development Bank estimates, inflation remained elevated at the start of the current fiscal year at 9.4pc in July and August and it is projected to accelerate further to 12pc on average in the remainder of the FY20 because of a planned hike in domestic utility prices, taxes, and the lagged impact of currency depreciation. Pressure from inflationary expectations can be relieved by government’s commitment to refrain from directly financing budget deficit by borrowing from the central bank as monetary policy continues to tighten.

Despite the odds, Pakistan’s agriculture sector will recover from weather-induced contraction this year, with major incentives in the agriculture support package of the government included in the budget for FY20, hopes the ADB. Its current account deficit is projected to narrow to 2.8pc of GDP in the ongoing fiscal year. Pakistan has been included among the World Bank’s list of “Top-20 improvers in Doing Business 2020.”

The signals of Pakistan’s economic recovery are still weak despite tall claims of the government. However, it has completed only one year in office and can improve the situation in coming months and years. Prime Minister Imran Khan has asked people not to lose patience with the government and wait for results of its harsh economic measures. He does not know how rising prices of essentials have affected the life of the common people, otherwise he would not have advised them. The government, especially in the Punjab and Khyber Pakhtunkhwa, where the Pakistan Tehreek-i-Insaf (PTI) rules, cannot absolve itself of profiteering, hording and black-marketing by retailers. It has left the people at the mercy of mafias, which does not require money to take action against them.