Dr Hafiz A Pasha
The economic situation continues to deteriorate in 2017-18. The last few weeks have witnessed a spate of more bad news. A beleaguered government near the end of its tenure could do little to reverse the negative short-term trends.
The bad news is in at least six areas. It starts with the worsening of the external balance of payments position to a visible slow down in the real sector of the economy. This is yet another piece of evidence that the PML-N government has left the economy in a fragile condition.
Given their importance, the recent developments on the balance of payments front are taken up first. The monthly current account deficit in April 2018 approached a hefty $2 billion. This was as much as 75 percent higher than the level in April 2017 and 55 percent higher than the deficit in March 2018. Already the cumulative current account deficit in the first ten months of 2017-18 has approached $14 billion. If the recent trend continues, it could reach $16.5 to $17 billion by the end of the year, equivalent to over 5.2 percent of the GDP as compared to 4 percent of the GDP last year.
The basic reason is the upsurge in imports. During the first nine months, the growth rate was 17 percent in comparison to the level last year. The month of April 2018 saw an increase in imports of as much as 20 percent. This is a clear indication that two devaluations during the year are not working in restraining imports. Alternatively, an inventory buildup of imports has started in anticipation of further depreciation of the rupee. The silver lining has fortunately been the big jump of 31 percent in exports in April 2018. However, the absolute increase in imports has dwarfed the rise in exports.
There was huge fall in foreign exchange reserves in the month of May 2018 of $1557 million. The average drop monthly in the first ten months was $556 million. As such, the precipitous decline in May was almost three times the monthly average. Reserves at the end of the month stood at $10 billion, not even enough to cover two months imports of goods and services. If ‘swaps’ are taken into account net reserves are not even $4 billion.
The sharp decline in reserves has enhanced perceptions about Pakistan’s ability to meet its future debt servicing obligations. Already, the flow of foreign assistance from multilateral agencies like the ADB, IBRD, IDA and IDB has ebbed. This assistance is largely concessional and the budget estimate for 2017-18 was $3807 million. From July 2017 to April 2018 the amount received is $2094 million, equivalent to only 55 percent of the target. Even worse, the amount disbursed in April by the multilateral agencies was only $152 million, less than 4 percent of the annual target. At this rate, there is likely to be a shortfall of over $1 billion by the end of the year. Consequently, the Government has had to seek substantially more borrowing, at relatively higher cost and shorter maturity, from international commercial banks, especially from China.
Turning to monetary developments, a truly unbelievable development has taken place. Government borrowing from the SBP has reached an all time peak level of Rs 2384 billion in the first eleven months of 2017-18. This is not only 160 percent higher than the corresponding level last year but is also even more than the cumulative borrowing from the SBP over the last 70 years.
This form of deficit financing has major implications downstream on the rate of inflation in the country. It is, however, preferred by Governments as it carries a zero cost. The interest paid reverts back in the form of higher profits of SBP. Monetary policy has to consciously restrain the resort to such borrowing if inflationary pressures are to be controlled. The PML (N) has truly left behind the prospect of high impending inflation.
Already, the inflation rate as measured by the CPI is beginning to perk up. It has gone up from 3.2 percent in March to 3.7 percent in April and 4.2 percent in May 2018. The ‘core’ rate of inflation has jumped up from 5.8 percent to 7 percent during these three months. There is the prospect of inflation rising further in the months of June and July 2018, due to a ‘low base’ effect. Inflation during these months in 2017 was down to below 4 percent. It will not be surprising if the increase in the CPI in July 2018 reaches 6 percent.
There are also some worrying developments on the fiscal front. The rate of growth of FBR revenues has been persistently declining on a month to month basis in 2017-18. From July 2017 to March 2018 a relatively high growth rate of over 16 percent was achieved. But in the months of April and May 2018 first indications are that revenues of FBR have floundered. The growth rate is down to 11 percent. On this basis, revenues are unlikely to exceed Rs 3800 billion in 2017-18, implying a shortfall of Rs 213 billion, equivalent to over 0.6 percent of the GDP. This alone will take the fiscal deficit to over 6 percent of the GDP as compared to the target of 4.1 percent of the GDP.
The first decision to be taken with fiscal implication by the caretaker Government was the setting of POL prices for the month of June 2018. The PML (N) government in its last days had shirked from the routine function of monthly price fixation. OGRA had recommended an increase of Rs 12.50 in the price of HSD oil per liter and of Rs 8 in the price of motor spirit. This had been the result of the big increase in international oil prices. Apparently, the new Government has opted to keep the prices unchanged thereby mimicking the behavior of populist governments.
The consequence will be a significant loss of revenues. The sales tax rate has had to be brought down from 15 percent to only 7 percent in the case of motor spirit and from 27.5 percent to 17 percent in the case of HSD oil. The consequential loss of revenues in the month of June 2018 alone will be almost Rs 20 billion. Given its limited mandate, the interim Government could perhaps have at least reverted to the standard GST rate of 17 percent in the case of these two products.
The real sectors of the national economy are also beginning to experience a downturn. The large scale manufacturing sector had shown a healthy growth rate of 6.2 percent in the first eight months of 2017-18. However, the monthly growth rate in March 2018 plunged to only 1.8 percent. This has brought the growth rate for the first three quarters down to 5.8 percent. If this slowdown persists in the last three months of 2017-18, then it will have significant impact on the sectoral and GDP growth rates for the year.
Load shedding is also back with a vengeance in these hot summer months. The additional generation capacity has not been able to compensate for the seasonal rise in demand. People are suffering more during the holy month of Ramadan. The power sector continues to be plagued by constraints in the transmission and distribution system and by a high and growing level of circular debt. The new government appears to be helpless in the face of these problems.
Potentially one of the most worrying developments is the acute water shortage in the on-going Kharif season. Already, it is clear that there will be a big shortfall in meeting the target of 14 million bales of cotton. Inevitably, this will put pressure on the import bill in 2018-19 to fill the resulting gap in supply of cotton to the textile industry.
Altogether, it is truly amazing as to how so many negative developments on the economic front have come together. The PML (N) Government has left a myriad of problems to be tackled. Hopefully, the caretaker Government will rise to the occasion and at least begin to reverse the trends by the time of the elections. Otherwise, the newly elected Government will have no other option but to take very difficult and unpopular measures soon after its induction into power.
The first signal already conveyed by the interim Government is the initiation of a dialogue with the IMF as part of Article IV consultation during its tenure. Also, apparently the World Bank has been requested to support the preparation of a wide ranging structural reform agenda. Ideally, this should be an indigenous effort with broad-based participation of the political parties, private sector and civil society. This could then be the agenda for speedy implementation and with minimal opposition by the newly elected Government after July 2018.
Finally, as this article was being finalized the Rupee has plunged to almost Rs 121 per US dollar in the open market. Is this an indication that the dreaded financial downturn is underway?
(The writer is Professor Emeritus at BNU and former Federal Minister)
