A bad first year

Updated September 02, 2019

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The story of last fiscal year’s (2018-19) economic performance is almost complete now. There is some good news but it is overshadowed by its negative aspects, giving an overall confusing direction of the markets and the economy on a whole.

The fiscal side showed a grim picture in 2018-19 and appears to remain a challenge throughout the current year, if not beyond. The market sentiment and investor confidence remain uncertain. The good thing is that the government seems beginning to listen to these alarm bells that it used to ignored until the close of the fiscal year ending June 2019.

The authorities may reduce discount rates, disburse public sector funds to targeted areas in the development programme and reduce approval processes to attract fresh investment to trigger growth factors affected by over-emphasis on documentation and over-regulation. The tough conditions are, however, unlikely to ease out in less than two years.

Read: In first year, govt sees record high fiscal deficit

As the PTI government also completed its first year in office, the fiscal year came to an end with a historic budget deficit of 8.9 per cent of GDP — the highest at least since 1979-80 — an era when deficits were driven mostly by investments in development. But last year’s deficit fell in the textbook definition of a “bad deficit” because it overwhelmingly emerged due to massive revenue shortfalls. Development was just 3.1pc of GDP, down from 4.6pc in 2017-18 when deficit stood at 6.6pc of GDP.

The total debt and liabilities now stand at 104pc of GDP — meaning that the size of the total economy is smaller than its debt and liabilities

All major fiscal indicators — both on expenditure and revenue side — showed deterioration during 2018-19. Not only did the original budget targets remain elusive, but the revised targets set in the supplementary budget were also missed by a wide margin. Even the revised estimates announced as part of the Federal Budget 2019-20 in June remained a far cry.

This presents a frightening picture. One, the revised estimates given in June were so close to the end of the fiscal year that there should have been nothing in doubt. What happened in the last 20 days of the year that pushed the budget deficit from 7.2pc of GDP to 8.9pc — a massive Rs800 billion or 1.7pc of GDP — and was unknown to budget makers and the International Monetary Fund that was part of the exercise? Two, how are next year’s budget targets reliable?

It was, nevertheless, clear that concrete steps were not at hand to reign in expenditures even though revenue shortfall surfaced much earlier in the first three quarters of the year.

Increases in the discount rate and currency devaluation are reported to have played the key role — close to 5.8pc of GDP — in increasing the deficit. Development fell by almost 45pc over the previous year.

One of the most damning outcomes of the last fiscal year was an unprecedented steep fall in the tax to GDP ratio, perhaps justifying the need for a massive Rs1.550 trillion worth of additional taxation measures during the current year. The overall revenue to GDP ratio flattened out to 12.7pc in 2018-19 compared to 15.2pc a year before.

But that was not all. Non-tax revenues last year amounted to Rs427bn, almost 44pc lower than Rs760bn in 2017-18. As such, the non-tax revenue amounted to just 1.1pc of GDP, exactly half of the 2.2pc of GDP in 2017-18. Non-tax revenue to GDP ratio was the lowest since 2001-02.

On the other hand, the large scale manufacturing (LSM) output plunged 3.64pc over the previous year, showing a contraction in industrial activity. The contraction was almost across the board — petroleum sector went down by 8.35pc and general industry went down by 2.83pc. High-speed diesel output dropped 10pc — a clear indication of the downturn in economic activity.

The performance of key industries like textiles, food & beverages, coke & petroleum, pharmaceutical & chemicals, automobile, non-metallic mineral products, iron & steel and paper and board was in the negative while fertilisers, engineering machinery and electronics performed better.

No wonder then that exports were down by 1pc during 2018-19. Imports on the other hand also dropped by almost 10pc, bringing down the overall trade deficit by more than 15pc to $31.8bn.

But here, the massive 52pc import contraction came about from power machinery as was long expected with the majority of the CPEC-related energy projects either completed or in the final stages.

A major improvement was noted in the over 31pc reduction in the current account deficit to $13.6bn at the end of 2018-19 when compared to $19.6bn a year earlier. The foreign exchange reserves at $15.6bn now are enough for more than three and half months of imports, even though the country’s net international reserves still remain in the negative.

The total debt and liabilities, on the other hand, have jumped almost 35pc to Rs40.215tr at the end of June 2019 when compared to Rs29.879tr on June 30, 2018. As such, the total debt and liabilities now stand at 104pc of GDP — meaning that the size of the total economy is smaller than its debt and liabilities — for the first time in 18 years.

Total debt increased by about 33pc from Rs28.437tr to Rs37.748tr, accounting for about 98pc of GDP. The gross public debt also now stands at 85pc of GDP or Rs32.705tr compared to Rs28.437tr in June 2018.

Based on some of these indicators, the New York based Standard & Poor’s (S&P) rating agency has affirmed Pakistan’s sovereign rating at B-negative long term and ‘B’ short term, with a long-term stable outlook. The rating, it said, was constrained by a narrow tax base and high domestic and external security risks.

The S&P forecasts the Pakistan economy to slow down to 2.4pc of GDP during the current fiscal year — a 12-year low. Taken together with relatively fast population growth of approximately 2pc per year, real per capita economic growth will fall to an anaemic 0.4pc.

That will contribute to a decline in Pakistan’s 10-year weighted average per capita growth to 1.8pc, below the global average of 2.3pc for economies at a similar level of income. The agency forecasts GDP per capita to fall to just above $1,200 by the end of this fiscal year, versus $1,565 in fiscal 2017-2018 owing to over 25pc exchange rate loss.

Published in Dawn, The Business and Finance Weekly, September 2nd, 2019