Waqar Masood Khan
Economic performance during Jul-Nov is a good basis to assess how the economy would fair during the fiscal year. We give a round-up of this performance across the key sub-sectors of the economy. [All comparisons are for Jul-Nov FY18 versus Jul-Nov FY17, unless otherwise indicated].
Economic growth looks very promising. The target for the year is 6%. The SBP, which normally holds a cautious view on growth, in its recent monetary policy statement has reaffirmed its assessment that the target would very likely be achieved. This assertion is supported by significant performance of the large-scale manufacturing (LSM), major crops so far and the flow of credit to the private sector. In fact, LSM has registered a remarkable performance. During Jul-Oct, it has registered an impressive growth of 9.64% compared to only 2% for the same period of last year. Out of the 15 sub-sectors carrying 70% weight in the production, 10 sub-sectors with a weight of 54.3% have registered positive growth. These included iron & steel (44.4%), automobiles (28.4%), engineering products (15.3%), non-metallic minerals (13.0) (including cement 13.1%), food and beverages 14.2%, coke & petroleum (15.7%). The main Kharif crops, namely sugarcane, rice and cotton (besides maize) have all registered higher growth than last year. In these sectors, highest production is expected in nearly a decade. With this, services sector would inevitably perform better and hence the growth target looks all set to be achieved.
Remarkably, growth continues to accompany price stability. Average inflation during Jul-Aug remained firmly under 4%, well below the target of 6%. This is contributed both by relatively stable international commodity prices as well as significant supplies from local production. The recent hike in international oil and cotton prices coupled with depreciation of rupee would definitely have an impact on prices going forward, however, we don’t see any major pressures building on inflation at least during the current fiscal year.
Data on investments is not reported on shorter intervals. We, therefore, look at some other indicators that would be helpful in determining the state of investments. The first such indicator is flow of credit to private sector during 1Jul-8Dec, which was Rs.105 billion, almost double of Rs.59 billion last year. The foreign direct investment was $1148 million compared to only $729 million, showing an increase of 58% over last year’s. Finally, the current account deficit was $6430 million compared to $3371 million last year, showing an increase of 91%. Current account deficit is foreign savings that add to national savings and thereby to investments. For these reasons, we expect a significant uptick in investments during the fiscal year.
The balance of payments presents a variety of messages. First, exports continue to register a double-digit growth of 12%. Second, import demand remains very high as it grew by 23%. Third, despite the absence of any CSF flows, services sector has produced a surplus, thanks mainly to remittances (which showed a positive overall growth) that significantly mitigated high trade deficit. Fourth, the current account deficit at $6430 million, which was higher by 91%, is showing rising financing needs and consequent vulnerability in the external account. Against this gap, a total financing of $3139 million was available leaving a gap of $3291 million that was filled through the drawdown on reserves during this period. SBP reserves were $12661 million as on 30-11-2017 compared to $16145 million on 30-6-2017. Reserves improved somewhat to $14332 million as on 15-12-2017 after proceeds from Sukuk and Euro Bonds of $2.5 billion arrived.
In a major policy shift, which was advocated by many analysts, the central bank announced that the exchange rate would be determined by market forces. There was a 5% depreciation of rupee since then. However, it is 8% since July. With this policy, the road to exchange rate stability would be bumpy. Consequently, one sees that the SBP is continuing to use precious reserves to support the exchange rate. Within two weeks of the arrival of the proceeds from Sukuk and Euro Bonds, reserves have increased only by $1.67 billion, meaning $829 million were used up in debt servicing and funding the financing gap. This state of affairs would not inspire confidence regarding the stability of the external account.
We now turn to assess the state of affairs in the fiscal finances. We have the official data on fiscal operations only for Jul-Sep period. We are only concerned with the fiscal deficit, which is reported as Rs.441 billion (1.2% of GDP), even though larger than what was reported in Finance Minister’s Press Conference on 16-10-2017, but significantly below what was expected based on debt accumulation numbers compiled by SBP for the period Jul-Aug, which indicated a marginal increase in debt (which is deficit) as more than Rs.1 trillion. It seems some accounting errors have been corrected, which is not unusual as it takes some time before government balances are used to retire MRTBs. But leaving that apart, we still have concern between debt numbers and deficit figure. The central government debt table for Jul-Sep of SBP shows an accumulation of Rs.637 billion (or 1.8% of GDP). Now this is a fairly large deficit, particularly when one realizes that the statistical discrepancy is reportedly a meagre Rs.4 billion only, as given in the fiscal operations data. If true, then we are heading toward a very large deficit that may be larger than 6%.
We are indeed suspecting a large fiscal deficit simply because the aggregate demand is very strong and rising, as reflected in rising imports as well in widening current account deficit. This in turn is posing fairly large external financing needs that are not forthcoming. As discussed above, proceeds of Sukuk and Euro Bonds are not going to last very long.
As we have been arguing, flexible exchange rate alone would not correct external account imbalance unless accompanied by a major reduction in fiscal deficit. Even though FBR collections are on track, there are serious shortfalls in revenues from GIDC and other non-tax revenues (mark-up, dividends and profits), without which fiscal deficit would remain high. On the expenditure side also, against a budgeted zero increase in current expenditures, actual expenditures have seen double digit growth. These slippages are not giving hopeful signs for a desirable fiscal outcome, so critically needed for supporting an otherwise buoyant and robust economy.
