Pre-budget Economic Review – Economic (or Bubonic) Plague? – I
(This is the FIRST in a series of THREE articles on Pakistan’s economy)
The Government of Pakistan (GoP) has boxed itself into a corner by its rhetoric about a supposed economic miracle which is far removed from the actual health of the economy and the portents of its future. A relatively moderate (but reasonable) performance by the present regime in the face of concentrated domestic and external economic adversity has come out in bad light because of unnecessary bombast. About expectations and targets set forth far beyond bureaucracy’s ability to accomplish, particularly because adequate documentation of the economy is lacking. Four areas must be studied to obtain a comprehensive overall economic review, viz. (1) Growth, GDP and Production (2) Public Finance (3) Relations with IMF and lastly but most important (4) Inflation and Prices.
The Growth Target of 6.9% set for 1994-95 is certainly not likely to be met due to a combination of natural and artificial reasons. Among them are, viz. (1) severe shortfall in cotton production (2) its commensurate fallout effect on cotton ginning, manufacturing, export and related services and (3) industrial production will fall far short due to (a) the law and order situation (b) power failure and load-shedding (c) in a Catch-22 gridlock, it has had a drag effect of the cotton industry while (d) compounding of the problems faced by the financial institutions in recovery of both capital and mark-up, acting as a further dampener on the economy. The actual Growth Rate is likely to hover around 5.0%, more than 25% below the projected 6.9%.
GoP has had some success in the control of expenditures but this has been exacerbated because government revenues have fallen far short of demand. This is mainly because (a) revenue collection targets were far too ambitious and (b) having been successful in terms of reduction of fiscal deficit from a high of 7.9% in 1992-93 to 5.9% in 1993-94, GoP went ahead and tried for an impossible target of 4%. In fact fiscal deficit would still exceed 5% by quite a margin. One weakness in revenue assessment is that GoP continues to be vulnerable to vested interests, giving unnecessary exemptions on the behest of their lobbies. Despite great rhetoric and public fanfare, requisite effort to plug the holes and leakages in administration and collection of taxes has not been seriously made. With the low elasticity of taxes with respect to income and rising prices, a less than satisfactory performance is the result. The structural changes have not yielded the expected results i.e. fall in revenues because of reduction in tariff levels has not been compensated by yield from newly introduced General Sales Tax (GST). In fact, this is likely to worsen because we are committed to lowering tariffs further. Moreover, GoP has no other weapon except recourse to the GST to increase revenues. Areas like Income Tax have done reasonably well but the sectoral gains have been lost because of the overall low performing GST.
GoP has been reasonably successful in the observance of conditionalities imposed by the IMF so far but it looks difficult in the present economic circumstances to maintain the required fiscal discipline. Resource mobilisation has not yet reached an adequate stage where IMF would be satisfied that their “battlefield surgery” on our economy has achieved satisfactory results. Whereas the Jan-Mar 95 instalment was paid relatively easily, the quarterly instalment to the IMF for the previous quarter, Oct-Dec 94 was accomplished with great difficulty involving the raising of money from abroad amounting to US$ 300 million (Pak Rs.10 billion) to meet our obligations. Foreign exchange outlays for international commitments towards present debt-servicing (about US$ 1.25 billion annually) means that US$ 300 million are needed per quarter. Given the blizzard of MoUs that we have been inundated with, an attempt to keep up with a projected financial obligation for US$ 5 billion envisaged to increase by a similar amount annually may be beyond intelligent financial assessment.
Balance of payments deficit on current account exceeds US $ 2 billion compared to last financial year’s US $ 1.6 billion. The only redeeming features have been foreign exchange revenues fluctuating between a high of US $ 3.1 billion to today’s US $ 2.5 billion and the relative stability of the exchange rate in its Pakistani Rupee-US dollar parity. However both these positive indicators are illusionary when you take out the sale receipts of PTC (Pakistan Telecommunication Corporation) vouchers which fetched US $ 862 million, thereby the reserves are about US $ 1.64 billion approximately. The exchange figures also contain sizable borrowing from IMF, World Bank and ADB amounting to US $ 450-500 million. Improvement in trading account in 1993-94 was a favourable development which along with increased home remittances contributed to building up foreign exchange reserves. However none of these is a stable and/or permanent feature. During the current financial year imports have shot up, particularly consumer items that are selling cheaper than those manufactured domestically, consequently trade account has deteriorated over last year. Foreign investment has not shown much improvement, reaching US $ 500 million compared to US $ 470 million over the same period last year. This includes both direct investment and portfolio interest. At the same time the relatively stable exchange rate conceals the fact that the US dollar (Pakistan’s intervention currency) has got a big beating in the international currency market. If we see the value of the Pakistani Rupee in terms of Japanese Yen and German DM, it shows substantial devaluation. Unfortunately when the US dollar eventually becomes stronger, the Pakistan Rupee may get another major beating. As such we are in a double jeopardy act in a “Heads I lose, tails you win” scenario.
The most worrisome area remains inflation. For fiscal 1994-95, the targeted price increase was 7%, this had already been exceeded by the end of Dec 1994 and we expect that by the end of June 1995 even the official figure will be double the targeted rate of increase in prices, almost 14%. Not only does this effect savers and consumers but more importantly the people’s confidence in the present GoP’s policies is eroded as the purchasing power of money is lost. There may be commensurate reaction in the streets during the long, hot summer if the budget is seen to be tough on the common man, the Catch-22 will be increased pressures on the economy.
Whereas in the first six months of the financial year from Jul 94 to Dec 94 GoP did manage to keep some control over fiscal policy, the focal point again has shifted to the inability of GoP to keep its fiscal house in order. The size of the fiscal deficit continues to be unsustainably large and the budget deficit as a percentage of GDP will remain about 5.9%. The major culprit has been shortfall in tax revenues which may be more than Rs 35 billion. Consequently without corresponding reduction in expenditure, shortfall will be met by bank borrowing, borrowing from the public and borrowing from external sources. This has strong implications for increase in prices, increase in domestic and external liabilities, with a consequential impact on debt servicing. Monetary policy has shown some slippage because of GoP borrowing in excess of the agreed amount of Rs 15 billion from the banking system. The private sector credit expansion has been kept within the limits initially agreed but the situation has been aggravated by the outflow of portfolio investment, the law and order environment, the movement of “hot” capital (speculation) and credit squeeze. The Stock Exchange sees major activity only in a blue-chip portfolio of 10-15 companies, the rest is manipulated by powerful groups to the detriment of the small investors.
To the credit of the State Bank of Pakistan (SBP) the monetary policy still remains on track, effectively curtailing demand, otherwise we would be in a much more serious position with respect to inflation. Inflation at substantially higher levels is basically a short supply phenomenon. Shortfall in agriculture production but more importantly, inordinate increase in demand for consumer goods, has contributed to the galloping inflation. This is especially acute in food prices which are much above the normal inflation rates averaging at about 22%. This severely affects the common man, particularly the average middle class family. Wholesale smuggling of consumer products and food essentials to Afghanistan and beyond to Central Asia, food essentials to Iran and India, has contributed to the inflationary prices. Because of large-scale involvement by our border population in smuggling (this remains the only source of livelihood), this is almost impossible to control. The only pragmatic solution is to increase production and supplies. The forthcoming wheat crop is good and may have a dampening effect on the rate of inflation but because of the likelihood of smuggling the Federal Food and Agriculture Minister Mr Talpur has spoken about the need to import wheat.
Much depends on the vagaries of Divine nature with a more than outside chance of reaction in the streets. The economic outlook is certainly not entirely bleak but the overall evaluation is that it is certainly far from the rosy picture suggested by GoP’s boundless rhetoric. As a credible economic barometer, the country’s plunging stock markets are fair indicators that the light promised at the end of our economic tunnel is still elusive. Our economic situation can be equated to a Hobson’s choice of facing a poisonous snake, a scorpion or a rat . Whereas one feels sharp pain at being bitten by the snake or the scorpion, one can still take immediate life-saving anti-dote measures. The most dangerous is the innocuous rat, with the threat of bubonic (economic?) plague since its teeth anaesthesizes the immediate region of the bite so that one does not feel the pain till much afterwards when it can be too late. Inflation, failure to control non-development expenditure, increasing of the debt servicing, rampant corruption, unnecessary import of consumer items, etc are factors which like a bunch of rats are eating away at the vitals of our economy. One may well wake-up in severe pain one day afflicted with an economic plague that forces one to use wheelbarrows to carry money to the bakery to buy a loaf of bread.
Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.
Comments
No comments yet.
Leave a comment