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Revival of economy trend

Prime Minister of Pakistan has recently claimed that economy is back on track and now stabilized, rupee is gaining without any support, main indicators are positive, current account deficit is in control and foreign reserves are increasing. On the other hand, Federal Board of Revenue (FBR) is saying that it has collected 17 percent more tax as compared to last year though FBR is considering to revise downward its annual target of PKR 5.5 trillion for the fiscal year 2019-20. Based on fresh numbers released by the government, it seems that there is an increase in exports and reduction in imports yet a lot of work is required. Macroeconomic indicators are presently good but exports are not increasing proportionately, which is a not a sign of relief.

Imports in current fiscal year have dropped by 23 percent, exports have marginally increased whereas government has done some good work in controlling the current account deficit which was not possible without taking some harsh measures. Due to those measures, people have paid a heavy price. Government officials claims that they had to take some measures to bring back the economy on track, but they don’t elaborate what measures they took in this regard. Here are few of the harsh steps taken by the federal government in recent months, devaluation of Pak Rupee by 35 percent, which is somewhat stable now, interest rates are doubled now since the level of 2017-18, additional taxes of around Rs. 700 billion have been imposed, petrol and electricity prices are regularly being increased. Cumulative impact of these measures have brought down the imports and has improved the current account deficit. Without these measures, present day economic stability (in the words of government) would not have possible. Now, its anyone’s guess, if a struggling economy can sustain such shocks and its impact on the commoner in this situation. Independent economists say that real economy at the ground level has affected badly, industrial production has dropped by nearly 6 percent, textile inputs have also reduced by almost 23 percent, cotton crop has dropped by approximately 30 percent that is somewhat attributed to high prices of fertilizer.

Government claims that economy has achieved a level where it is being on the path of stabilization and focus will be on the growth and development in the coming months. There is no doubt that stability has been achieved at a macro level but it has not yet been felt at a micro level, which is even more exposed to financial vulnerabilities now. Economic situation cannot be called satisfactory as long as it doesn’t bring stability at a micro level. There are few measures which show that government is relying heavily on the hot money, which is one of the reasons for higher interest rates. It is an interesting situation where independent economists assess that inflation in the country is in a single digit whereas State Bank of Pakistan and government insist that inflation is in double digit. As per the agreement with IMF, interest rates have to be 2 percent higher than the inflation rate. Due to this condition, State Bank is keeping interest rates at the current level of 13 percent while presenting inflation in double digit. There is no question about inflation and prices of every consumable item has increased in recent months. But there is some margin where interest rates can be reduced by at least 2 to 3 percent. With the current level of interest rates, significant economic activity and expansion in businesses are virtually not possible. Foreign investors including banks and hedge funds are enjoying high interest rates with a stable dollar rate in Pakistan. But this trend will deindustrialized the local industry.

In another area, government has virtually no development spending in the first quarter of current fiscal year, numbers of second quarter are yet to be formalized and published. But the development spending might not be very encouraging. We hardly see any infrastructure project currently being started but we see a number of initiatives which are initiated to make Pakistan a social welfare state. It would be interesting to see if a country which is highly dependent on foreign aids, grants and concessional loans but trying to become a welfare state rather than first becoming an economic independent country and thereafter becoming a welfare state.

Our biggest problem is that our priorities are not in line with the ground realities and there should be a sequence of events under which policies should be carried out. May be no one is interested in understanding the importance of certain things and they are too much obsessed about their political views. Similarly, people are also not understanding the importance of certain events, they just follow the slogans. Why not first stabilize the economy and thereafter spend on the social issues and make a social welfare state. But keeping the social issues at the top while economic activities at the bottom will further aggravate the situation and financial situation of the people. Just to elaborate my point, providing free health service from taking loan from IMF or ADB doesn’t make sense, where industry is shutting down due high interest rates. But if tax is collected from the industry and thereafter state provides free health service to its people will not cost the country as such.

Anyhow, FBR has managed to increase its revenues by 11 percent in the first 5 months of the current fiscal year and that increase is attributed to massive tax drive and FBR has virtually imposed tax on every item and activity. Therefore, the increase in tax revenue cannot be attributed to the economic activities but it is due to brining in new tax payers in the tax net and by imposing tax or increasing tax rates. In either case, everyone should support government and FBR in their drive to bringing more and more people in the tax net.

State Bank says that it is keeping interest rates on the higher side to keep the inflation under control. Most of the business are taking loan as a working capital and in this situation, higher interest rates means higher cost of working capital which means higher cost of business thus businesses are not been able to do normal business operations consequently making it difficult for them to operate. The problem is not that simple, industrial units have to operate their units even at break-even level or at some loss otherwise they will be wiped out from the market completely. Taking a decision to continue the business as usual in the current economic environment or to shut down for few months, is the biggest challenge a businessman is facing these days. In case of discontinuation, it will not only lose the market share, trained skilled trusted labor, but its idle machinery will also have numerous technical issues thus it decides to operate the unit even at some loss with a hope to revive the business in coming months. But there is a limit to sustain the losses, all can’t operate even if they have losses therefore, some quit at some point.

Pakistan has to pay off debt around USD 12 billion in the current fiscal year, whereas current level of foreign exchange is around USD 8.1 billion, which means the ratio is less than 1. This trend is too risky. Pakistan factored in around USD 13 billion concessional loans from multilaterals and donor agencies in the budget 2019-20. Out of this, Pakistan has so far secured around USD 2.5 billion only. World Bank and ADB has committed USD 1 billion each out of which only USD 100 million has so far been disbursed by the World Bank.

Today, dollar rate is stable and it is being said that people are now selling dollars instead of buying dollars. Dollar lost by 9 rupees in the last 6 months against Pak rupee. Government is happy on recent improvement in its credit ratings by Moody’s as well. Moody’s has upgraded Pakistan’s economic outlook status from negative to stable. Pakistan’s economy rating is still at B3. It has upgraded Pakistan’s status after the improvement in the current account deficit. Report says that change in the status reflects Pakistan’s relatively large economy and robust long-term growth potential, coupled with ongoing institutional changes that raise policy credibility and effectiveness, albeit from a low starting point. But Moody’s has also highlighted Pakistan’s External Vulnerable Index due to higher repayment of debt in the coming months. Pakistan is too much exposed to external pressure now. Budget deficit is at a highest level of around 8.6 percent. Government should focus on reducing interest rates so that local businesses can get working capital locals from the banks thus economic activities can be revived. Payment of refund to the exporters is also slow, so far only Rs. 30 billion has been refunded whereas government promised to refund Rs. 125 billion till 31 December 2019. In all practical reasons, the target refund of Rs. 125 billion will not be achieved. It is being said that the ongoing fiscal reforms will gradually strengthen the economy in the coming months, so we should wait and see the outcome of new polices. Meanwhile, government should also focus on supporting SMEs and take very strong measures to control the smuggling.

Writer is Islamabad based consultant and can be contacted on Twitter (@aroojasghar)

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