Macro targets look too ambitious

Published June 7, 2021
Setting a five per cent GDP growth target to be achieved at the cost of 8.2pc inflation and not more is a political requirement of the PTI’s maiden government. — AFP/File
Setting a five per cent GDP growth target to be achieved at the cost of 8.2pc inflation and not more is a political requirement of the PTI’s maiden government. — AFP/File

Setting a five per cent GDP growth target to be achieved at the cost of 8.2pc inflation and not more is a political requirement of the PTI’s maiden government.

A slower growth rate cannot create the targeted 1.2 million to 1.9m new jobs. And, inflation of more than 8.2pc followed by 9pc or more in 2020-21 could be too backbreaking for the 220m Pakistanis.

The State Bank of Pakistan (SBP) has kept its policy rate unchanged at 7pc for June-July and has reiterated that any increase in it will be measured and gradual. This means the government will have the required monetary policy support for a pro-growth budget.

The government also plans to enlarge public-sector development spending from the initially projected Rs800bn to Rs900bn.

A 5pc growth can be elusive if the SBP opts for monetary tightening

The 5pc growth target is an upward revision from that of 4.2pc. This, in turn, has necessitated an upward revision in the inflation target from 8pc to 8.2pc.

The first problem that the government would likely face in realising these targets is that 5pc growth is unlikely to be achieved with just 8.2pc inflation. The central bank has indicated that this fiscal year, inflation will be around 9pc. But year-on-year consumer inflation in May, the second-last month of the fiscal year, stood as high as 10.9pc. National average inflation for the first 11 months of 2020-21 was 8.83pc.

These readings suggest that 2020-21 inflation can exceed 9pc, particularly if high food inflation persists. In May, yearly food inflation was 15.3pc in urban areas and 12.8pc in rural areas.

If the central bank goes for even a measured and gradual monetary tightening any time in the next fiscal year, the 5pc growth target could become elusive. A higher interest rate will affect aggregate demand.

A second uncertainty is that the overall growth target has been set on a very optimistically projected performance of the three main sectors of the economy: agriculture, industry and services.

The government has projected that agriculture will grow 3.4pc, industry 6.8pc and services 4.7pc. In the current year, agriculture grew 2.8pc with strong showing of three major crops i.e. wheat, rice and sugar cane.

Achieving high GDP growth and creating up to 1.9m jobs will require the government to rationalise taxation for the entire private sector

A key question is: how will the outputs of these crops rise enough (from an already high base of this year) to boost overall agricultural growth of 3.4pc? How will this happen despite a serious water shortage being experienced in Sindh and Punjab and amidst an obvious lack of coordination between the federal and provincial governments?

Achieving required growth in industrial and services sectors will also require overstretching the current lax monetary policy, low or no inflation-adjusted increase in minimum wages of workers and no significant increase in energy prices. Is this possible? Only time will tell.

Achieving high GDP growth and creating 1.2m-1.9m jobs will require the government to rationalise taxation for the entire private sector in general and for growth-contributing sectors in particular. Finance Minister Shaukat Tarin admits this fact. But that essentially means the government will have to make a few compromises on taxing businesses according to their potential and on expanding the tax net.

Credible media reports say the government is willing to offer such tax incentives to property owners and property-renters that will bring in a few billion rupees into the national kitty but compromise on the economy’s documentation. Such moves will eventually boost the parallel economy, expand the volumes of currency in circulation and contribute towards increased inflationary pressures. How will the government then be able to contain inflation at 8.2pc?

Will incentivising the private sector generously (for higher GDP consideration and out of political needs) ensure the implementation of increased minimum wages for workers? This seems uncertain. And, will such incentivising not compromise the need for an overdue shift in the composition of our tax revenues from indirect taxes to direct taxes?

Setting minimum wages for 2021-22 will become all the more complex if the government decides to fix them high enough to ensure an increase in the real disposable incomes of workers. That will likely irk the private sector on the one hand and inflate the government’s own administrative cost on the other. But if the government does not do it, that will cause unrest among people already braving lower real income amidst high inflation. Increasing the real income of people, meanwhile, is necessary to lift aggregate demand to meet the 5pc growth target.

Tied with this growth target is the government’s assumption that gross revenue in the next fiscal year will grow to Rs7.9tr. In the first eleven months of this fiscal year (in which GDP grew at a revised estimated rate of 3.94pc), the gross revenue collection totaled almost Rs4.4tr. The revised target for the full-year collection is almost Rs4.7tr. Taking the revenue collection from this level to Rs7.9tr in a year will surely be very difficult, particularly if the government does not aim at bringing all the taxable income under the tax net and insists on rationalising taxes on the real sector whose tax potential is too huge but collection too low.

On the expenditure side, too, the next fiscal year is sure to pose two key challenges: first regarding domestic debt servicing and the second in relation to defence expenses.

Whatever gain the government has made in domestic debt servicing in this fiscal year is the direct result of low prevailing interest rates. It is naïve to expect that the interest rates will remain at the same low level of 7pc or close to it throughout the next year.

In case of even a moderate interest rate tightening, the cost of domestic debt borrowing will increase, putting pressure on expenditures. And, security challenges are set to compound once the United States completely withdraws from Afghanistan in September this year. This means defence expenses will also rise.

Published in Dawn, The Business and Finance Weekly, June 7th, 2021

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