An economy losing steam

Most glaring example of unsound fiscal management is primary deficit

ISLAMABAD:

As the Economic Survey 2021-22 indicates, we should celebrate a respectable growth rate of 5.97%, a rise in exports by 27.8% and an increase in tax collection by 28.1%.

These numbers mask three important facts. First, the growth rate has, once again, brought us to an unsustainable current account deficit, thus subjecting us to an IMF bailout.

The “policy structural break” was the shift between Abdul Hafeez Sheikh and Shaukat Tarin. Between these two finance ministers, the PTI government essentially lost all its goodwill it had accumulated.

Second, the rise in exports is not the result of an increase in productivity or policy – it is the result of a rise in international prices.

While the rise in exports is a welcome sign, one needs to question if this was a result of any policy or improvement in the competitiveness of our industry or was it driven by international factors.

We have argued that this increase was unrelated to the government or industry and is likely to be reversed – unless we can demonstrate growth in new sectors.

Third, the increase in tax collection was largely driven by an increase in the import tax receipts, which increased the cost for both businesses and consumers. Some 45% of our tax revenue is realised at the import stage, which is the highest in the world.

The most important question is whether our economy is in a financially sound position or not? My short and simplified answer is “No”. Our economy is losing steam, or perhaps has lost it.

The most glaring example of the unsound fiscal management of an economy, especially when it is under an IMF programme, is the primary balance, which ought to be positive.

Primary balance is the fiscal balance adjusted for interest payments. In other words, our fiscal balance should be marginally higher than the interest payments.

The Economic Survey mentions that we had a primary surplus of Rs451.8 billion in FY21, which has turned into a primary deficit of Rs447.2 billion in FY22.

This is the direct result of a disproportionate rise in the total expenditure, which rose by 27%, accounting for a 21.2% rise in the current and 54% rise in development expenditures. It brought growth at a very high cost, basically costing once again our financial freedom.

As a policy instrument, we continued to depend on interest rate, which was increased by 675 basis points (bps) in one year, but it failed to stem the rising inflation, as it was coming from elsewhere.

State Bank of Pakistan’s (SBP) autonomy is principally laudable, however, it is inconsequential in our economy at the moment as consumption is continuously being fuelled by remittances, and to some extent, cash transfers, as the Economic Survey rightly notes.

The other indicator of the major failure was a steep increase in the current account deficit – from $543 million to $13.8 billion in one year.

It is attributed to the rising trade deficit, which itself is a function of import expansion on account of higher demand.

The productive capacity of the economy has not kept pace with the rising demand, which has resulted in a spiralling trade deficit and a current account deficit which the economy is not able to sustain.

The current account deficit itself is not a bad thing, and we can tolerate up to $7 billion of deficit at the current level, however, anything beyond that level will be unmanageable.

In hindsight, once we had achieved a desirable level of current account deficit last year, the government should have contained its spending and should have introduced policies to bring in foreign direct investment (FDI).

Instead, it took the opposite step and introduced off-budget subsidies. It also obstructed free and competitive capital resource allocation by heavily leveraging the construction sector, which blocked capital without adding any tradable stock to the national assets.

The introduction of off-budget subsidies and an artificial reduction in fuel prices not only halted the IMF programme, they also deteriorated our fiscal account sharply.

The new government inherited this economic mess, but by not moving to correct the mistakes quickly, it has lost a strategic opportunity, which will not come again.

The writer is the founder and executive director of PRIME, an independent economic policy think tank based in Islamabad

 

Published in The Express Tribune, June 13^th, 2022.

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