October 17, 2007	Wednesday	Shawwal 4, 1428

The ECC was told the other day that the foreign exchange reserves have risen to $16.34 billion. That was the only good news it had. This has now been the party line in the past seven years to tell the public that we are out of the “Khazana khali” syndrome of the nineties. But there is a relapse of two other syndromes – the current account deficit and the fiscal deficit.

Information coming from the external accounts is extremely disturbing. The efforts to manage the current account deficit effectively so as to keep it within an acceptable band, has been failing since 2005-06. And the villain of the piece is the trade balance. The first quarter of the current year has thrown up a trade deficit of $3.6 billion. A target of $10.6 billion had been fixed for the whole year. On present showing, the full year target would possibly be reached in three quarters.

For exports, this state of affairs means that the big talk strategy about adequate preparation for the competitive forces unleashed by the WTO regime has not worked. Rising imports have incessantly been billed as bringing in modern machinery and necessary materials for export industries and manufacturing investment in general. This is only part of the story. Importing hastily for fear of food inflation and the rising energy costs fill the other part. Conservation is neither an official option nor a private preference. New refineries are.

In fact, the large scale manufacturing, the mainstay of exports, is not out of the woods either. Last year, no data on its growth was issued after the first quarter. It is worse this year; now data is available after the first month of the current fiscal year, in which the growth was a mere 6.3 per cent. The target for the year is twice that much. Slack manufacturing hits exports. The major cost disability results from fuel. There is world demand, but understanding the nature of this demand in terms of changing designs, environmental preferences, uncompromising health standards continues to present problems. The English language (an advantage the Chinese still do not have) and the name change of the Export Promotion Bureau are hardly of any advantage.

Reserves can be accumulated by borrowing, as is increasingly the case in Pakistan. The other sources are foreign direct investment and remittances. But the natural means of accumulating reserves is exports. However, this cannot be the case in a situation where exports paid for only 57 per cent of the imports last year. As things are, it will be even less than that this year. In 1999-2000, exports financed as much as 83 per cent of imports. The foreign exchange reserves were only $2.1 billion. You do not need to go to Harvard to appreciate which state of the play is more sustainable to achieve the kind of GDP growth rates being talked about.

A cat and mouse game is also being played with fiscal deficit. No one really knows what the fiscal deficit target is, or for that matter, what was the actual last year. Finance Ministry’s website is silent on it. The Annual Plan and the Economic Survey precede the announcement of the budget and only contain an assessment of 9--10 months data. All we know is that the target for last year was 4.2 per cent of GDP and it was exceeded significantly. A starred explanation had justified its height by saying that it includes the earthquake expenditure, which is exceptional.

Well, the exception continues this year. Indeed there will now be a double-starred explanation due to the exceptional “development” expenditure related to buying election support, be it in the form of a large Khushhal Pakistan Programme, presidential, prime ministerial or chief ministerial directives and packages or the massive media campaigns costing billions. This lunch is certainly not free.

State Bank’s pleadings to the government to resort to less liquid longer term borrowing to finance the deficit have neither been supported by the managers, nor is the market very keen on it. Another piece of advice by the State Bank to retire the past borrowing of around Rs62 billion has gone unheeded. There are no indications that the Finance Ministry is observing quarterly ceilings on borrowing.

There are, however, clear indications that the Federal Board of Revenue is nowhere near its target of revenue collection in the first quarter. The official explanation on offer is that the extension of the date to file tax returns has delayed full information and the final tally may be better than it looks. These tax returns relate to the last year and have absolutely nothing to do with the first quarter of this year, unless the Board used some creativity to improve last year’s collection for the budgetary fanfare and now some reconciliation has to take place.

With large scale manufacturing growth dipping in the first quarter and unlikely to do any better in the second quarter because of, among other things, the fence-sitting imposed by the looming electioneering and the uncertain prospects about the two out of the three main kharif crops, the state will be earning less and borrowing more to spend its way out of the political quagmire. Even if the political clouds clear up by the end of the middle of the third quarter, the remaining period of the fiscal year will be used up by a new government to get its feet wet. Fiscal deficit will break the barrier of 4.5 per cent and may well move closer to 5 per cent.

Inflationary trends are already corroborating with this story. The rate of inflation in the first quarter is 7.1 per cent, which is better than the corresponding quarter last year. On a monthly basis, the deceleration is insignificant. The September on September rate of inflation was 8.4 per cent compared to 8.7 in 2006, with food inflation persisting in the double-digit. These numbers do not give the confidence that the current year target of 6.5 per cent will be achieved.

The tidings on the economic horizon make one wonder whether the return to the civilian rule will be greeted once again with the twin menace of burgeoning fiscal and current account deficits and the spectre of persistently high inflation. The present managers are dismissive of trade imbalance and gung-ho about core inflation. But if the food inflation does not fall after Ramazan, the core will be disturbed too as the accommodation of fiscal imprudence will start taking its toll.