Waqar Masood Khan

We have nearly full data for the first two months of the fiscal year. The level of expenditures, tax collections, large scale manufacturing, balance of payments and foreign investment are showing mixed trends.

Before we analyse the data, let us remind ourself that the key objective of economic policy is stabilisation, particularly in view of the ensuing slow-down in economy due to floods.

The most important information is contained in the data on the balance of payments (BoP) for July and August. The exports (fob) have shown a healthy growth of 11.4% over the same period of last year. But what is more striking are the exports in August, which have soared to $2,813 million from $2,280 million in July, showing a growth of 23%. This is a remarkable performance, indeed, particularly in view of the evolving recessionary conditions in the world economy, which would adversely affect our exports.

Imports’ performance, on the other hand, is not satisfactory. As against $11,098 million in Jul-Aug this year, imports (fob) last year amounted to $11,338 million, which is only down by a meager 2%. More disturbing is the rise in imports relative to July. In August, imports amounted to $5,750 million compared to $5,348 million in July, showing a growth of around 8%. This is disconcerting. We desperately need to control imports, which are barely below the last year’s level, a year that saw unravelling of macroeconomic framework simply because of exceptionally high imports, especially unnecessary imports of POL at the fag-end of the fiscal year. We hope these numbers are due to trade disruption seen due market volatility in June and July, and in the coming months it would be smoothened out.

The trade account during Jul-Aug has shown improvement of about 11% compared to last year. The services account has also shown an improvement of 9%. Balance on primary income improved by 8% but balance on secondary income (which includes home remittances) showed a decline of 7%. Home remittances were down from $5,419 million last year to $5248 million this year, showing a decline of 3.2%

During Jul-Aug, the current account deficit (CAD) was recorded at $1918 million compared to $2,374 million for the same period of last year, showing a decline of 19%. Although this is a positive development but the level is still quite high. The IMF programme has envisaged a CAD (current account deficit) of $9,280 million, which requires a monthly average of $733 million or $1546 million for two months. The present level of $1918 million is still high and should be brought down in the coming months.

Foreign investment has been low for quite some time now. But continued sinking from such low levels indicates that investment environment is quite dismal. Against $212million last year, foreign direct investment fell to $102 million, showing a decrease of more than 50%. Portfolio investment, on the other hand, has shown an even more dismal picture with an outflow of $25 million as against an inflow of $951 million last year.

The LSM data for July is also available. As expected, the data shows a declining trends both relative to last month as well relative to July last year. On a month-on-month basis (July vs. June), LSM growth was negative 16.5%, whereas on year-on-year basis (July vs. July last year) it declined by 1.4 percent. This is perhaps the strongest sign of economic stabilization. Production decline of 16.5% from the peak of June shows that the industry is also cooling off. This will have salutary effect on imports demand also.

The position of revenue collections during Jul-Aug period appears to be up to the mark relative to department’s own targets. Against a target of Rs.926 billion, the actual collections amounted to Rs.947 billion, depicting a 2% higher collection relative to target. However, compared to last year’s collections of Rs.906 billion, the growth amounted to 4.5%. This compares not favorably from the required growth of 23% needed for achieving the monumental target of Rs.7470 billion.

On the other hand, data on expenditures is typically available on quarterly basis and that too after two months of completion of the quarter. However, a report has been published in a newspaper based on two months’ expenditures for July and August. It shows expenditure of Rs 1.1 trillion and 71% of this has been spent on debt servicing and defence. With such a start on expenditure side, together with weak revenue performance, we may face challenges in balancing the fiscal side as agreed with the Fund. We are committed to bringing down the primary deficit of Rs 1,601 billion last year to a surplus of Rs 153 billion. This is a tall order and would not be possible in case we experience slippages relative to the budgetary allocations.

There are two positive news regarding prices and exchange rate. The weekly sensitive price index (SPI) has shown a downward trend during the last three weeks starting from 8th September to 22nd September. In the last week it showed a remarkable decline of 8.11%. On an annual basis for the corresponding week inflation has come down from about 43% to 29%. These are significant gains and could well be the harbinger of easing inflationary pressures.

Another significant development is in the forex market where rupee has made notable gains. From nearly Rs.240/$ the interbank rate has come down by Rs. 7 to Rs 233/$ while in the open market the rate has come down from Rs 245/$ to Rs 234/$. These changes are in accordance with our submissions in previous articles that market conditions are not consistent with the fundamentals of the economy. We expect this strengthening of rupee to continue as was expected at the time of the revival of the Fund programme.

In summary, we see continuing challenges facing the economy but there are clear signs in the external account, inflation data and forex market behavior depicting some early signs of recovery and stability. If these gains are consolidated they may serve as foundation for a robust turnaround in the economy.

(The writer is a former finance secretary, government of Pakistan)