THE government seems to have taken a strategic decision to spend its way out of the tight economic situation it has landed itself into, by formulating a formidable budget as well debt-driven consumerism without any thought to the dangers of inflationary fires that such a policy would cause and the expansion in the current account deficit that it would entail.
The purpose seems not to reform the economy but to ensure that the voters go to polls with their pockets full.
In the pre-budget briefings spread over three days in Islamabad last week and conducted by the country’s top economic managers, it was conveyed in unambiguous terms that no steps were on the anvil to fine tune the monetary policy to cool the economy.
In fact a generous use of subsidies are expected to be used to tackle poverty instead of using corrective fiscal measures to narrow the gap between the rich and the poor.
In order to keep the consumer-driven imports within the reach of the rich and the upper middle classes and also to maintain the prices of imported essentials within reasonable limits, the government seems to have decided to keep the rupee overvalued.
The government seemingly believes that if it kept promoting the automobile, electronic and white goods consumption by giving the producers all kinds of incentives and tax breaks on the one hand and allowing on the other cheap bank credit to the consumers, even to those who could not dream of affording these items in their life time, the resulting expansion in the manufacturing sector would yield exportable surpluses and automatically take care of the burgeoning import bill in 3-4 years. That is, by 2010 Pakistan too would be standing along with China and India leading the Asian century.
As a result, the import bill is likely to expand further in the next year mostly driven by high domestic demand, high world oil prices, domestic shortages, overvaluation of the exchange rate and rising fiscal deficit.
The government is committed to maintain a foreign exchange reserve equivalent to the import bill of six months. But then it seems that in the outgoing year these reserves would fall short by almost a billion dollar of the target as the import bill is likely to touch the $28 billion mark while the reserves are just a little over $13 billion.
And there seems no way that this trend could be checked in the next fiscal as well because the government has decided to present on June 5, 2006 a ‘caring budget’, a ‘pro-poor budget,’ a’ pro-relief budget’. These are the terms used by the official economic managers during the pre-budget briefing to describe the forthcoming budget. Perhaps the purpose was to provide the media with ready- made positive jargons to colour their budget reports.
With private consumption expenditure expected to continue to rise over the next 12 months, there appears to be no hope of any slowing down of the domestic demand for increased imports. As it is, the trend in private consumption expenditure has become highly scary. It has increased 29 per cent in 2005, rising to 80 per cent of GDP from 73 per cent in 2004. Indeed, in the outgoing year 153 per cent of growth achieved is because of private consumption spending. In the outgoing year, the country suffered from shortages of wheat, sugar, cement, pulses and fertilizers. The government met these shortages with imports. And it is likely to do the same next year as well. The reason being that the very people who make government policies are very those who make killings by creating artificial shortages of such commodities.
If one analysed these shortages one would see that most of these shortages, specially of sugar and cement were caused by industrialists whose representatives sit either in the federal cabinet itself or wield enough political clout to influence the government policies.
Since elections have also been announced in the meanwhile, one expects the government to allow these politically powerful insiders to continue to plunder in the next two years as well to keep them happy and supportive of the present set up. So we can expect more artificial shortages in the coming two years which would again be attempted to be met by imports and thus causing the import bill to further inflate.
According to the latest analytical report of a private financial institution, the induced stability in the exchange rate over the past two years has strongly supported domestic consumption.
SBP’s indices on the real effective exchange rate (REER) suggest an overvaluation of the rupee in trade-weighted terms of around four per cent as of June 2005. However, since then, given the adverse inflation differentials between Pakistan and its major trade competitors, the magnitude of the overvaluation has possibly increased (although the fact that the Chinese yuan and the Indian rupee have appreciated in nominal terms since could have mitigated its extent).
The import to GDP ratio which had jumped to over 22 per cent in the outgoing year from a mere 14 per cent in 2000 is likely to soar further in the next year as the government seems to have decided to use the instrument of imports to tackle rising demands, supply shortages, poverty alleviation and politically driven capital formation in the black economy.
The current year is expected to end with a fiscal deficit of 4.2 per cent of the GDP against a budgeted target of 3.8 per cent. The collection of tax revenue reached Rs518 billion or 6.94 per cent of the GDP which is much lower than last year’s 7.4 per cent of the GDP. Similarly the CBR collected Rs485 billion taxes in nine months or 6.50 per cent of the GDP against last year’s 6.54 per cent. And to top it all defence expenditure at Rs175.8 billion in the first nine months of the current year is set to surpass its annual target while development expenditure at Rs204 billion is likely to fall short. With such low tax to GDP ratio and rising non-development budget, the fiscal deficit cannot but keep rising.
The rising fiscal deficit indicates public sector dis-saving, and together with the lack of private saving, it has caused a serious current account imbalance. As reported by the SBP what is worrying is the growing fiscal laxity on the part of the government, which is reflected, in the sharp increase in current expenditure led by defence spending. Development spending on the other hand has lagged. This trend is not likely to be checked in the next 12 months and therefore, one can expect further negative developments for public finance and the balance of payments would come under further pressure.
Even with the high rates of nominal GDP growth recorded over the past three years, the share of imports as a percentage of GDP has risen cumulatively by 6.4 per cent since 2004. It is likely that the high consumptive demand supported by stimulative policy settings would continue in the next year as well.
And this may further expand the current account deficit to nearly $8 billion against the current year’s estimated $6 billion. The foreign exchange reserves are not likely to go beyond $14 billion while the draw down would amount to about $700 million.
But then perhaps the likelihood of privatisation of the two-gas distribution companies, OGDCL, PSO and a couple of power distribution companies is likely to bring in the needed resources to bridge the expected wide gaps in the current account. But then how long would the nation live on the sales proceeds of the ‘family silver’?
THE government seems to have taken a strategic decision to spend its way out of the tight economic situation it has landed itself into, by formulating a formidable budget as well debt-driven consumerism without any thought to the dangers of inflationary fires that such a policy would cause and the expansion in the current account deficit that it would entail.
