The messy economy

Published March 20, 2023

In a little over eight months of this fiscal year (between July 1, 2022, and March 3, 2023), the PML N-led federal coalition government borrowed Rs1.961 trillion from commercial banks to fill in fiscal gaps in its revenue and expenses. During the same period of the last year, the then PTI government had borrowed about one-third of this amount —Rs619 billion, according to the State Bank of Pakistan (SBP).

This is one big piece of evidence of the seriousness of the ongoing fiscal crisis. But the crisis is not entirely of the current regime’s making. Fiscal imbalance expanded phenomenally during the last year of the PTI government — and the current government only contributed to its further expansion.

The fiscal deficit, or the gap between the government’s income and expenses, has been at the heart of the ongoing external account crisis. As of March 10, 2023, SBP’s forex reserves totalled $4.319bn. In end-March 2022, less than two weeks before the ouster of Imran Khan as prime minister, the central bank’s reserves stood at $11.425bn.

On March 17, 2023, the rupee traded at 281.71 per US dollar in the interbank market. On April 8, 2022 (the last working day before Imran Khan’s departure from the prime minister’s office on April 10), it was at Rs184.68 to a US dollar. This massive 52.5pc depreciation in the rupee value plus a sagging economy, higher energy prices and food shortages after last year’s super floods pushed headline inflation up from 12.7 per cent in March 2022 to 31.5pc in February 2023.

Whether the general elections are held on time or earlier will not make a big difference because the twin deficits are big enough to give policymakers constant headaches

During the current fiscal year ending in June, the fiscal deficit will surely rise as the cost of external and internal debt servicing has increased due to the rupee’s decline and tightening of interest rates. This means the government will only continue to borrow more debts from commercial banks during the April-June quarter.

Banks will keep investing funds in government debt papers instead of lending to the private sector. The private sector’s credit appetite is already low thanks to the withdrawal of subsidies, high energy prices and very high interest rates.

Large-scale manufacturing (LSM) output in January this year recorded a yearly decline of 7.9pc. And LSM reading for seven months of this fiscal year (July 2022-Jan 2023) showed an average fall of 4.4pc.

The political chaos that only deepens the economic mess may reduce in the coming weeks. But the messy economy cannot be straightened only with it. Whether the next general elections are held on time in October — or a bit earlier. That, too, will not make a big difference. The fiscal deficit will remain too large, and external sector financing gaps will remain big enough to give policymakers constant headaches in the remaining three months of this financial year.

However, a framework for addressing issues in the next year, starting in July, can be made after achieving a broader consensus among all stakeholders of the state. Whether you call it the Charter of Economy or the Frame­work for Economic Recons­truction, a policy detailing how government expenses can be reduced and its revenues can be increased is the need of the hour.

The same policy must also propose how exports and remittances can be increased in short to medium term and how huge volumes of foreign debts can be reprofiled or restricted.

Once this policy is made at the state level, its implementation needs to be guaranteed under the supervision of the parliament. Pakistan has so far resisted some of the International Monetary Fund’s (IMF) conditions that call for what our establishment views as an unnecessary intervention in the country’s strategic defence requirements.

But if we don’t set our house in order, such demands (like the alleged call for giving up long-range missile programmes) may keep coming up in future. The best way to avoid them is to show the IMF and the world that the country has a national policy addressing its key economic issues, including a shortage of foreign exchange.

If we do this, it will encourage friendly countries to come forward and provide the forex support we need right now, besides making corporate Pakistan confident enough to work harder and achieve the goals of economic stability.

Merchandise exports in February 2023 slumped to $2.35bn from $2.834bn in February 2022, showing a decline of 18.7pc, according to the Pakistan Bureau of Statistics (PBS). Overall exports in eight months of this fiscal year (July 2022-Feb 2023) also fell to $18.793bn from $20.573bn in the same period of the last year.

But it is heartening to note that export earnings in February were slightly higher than in January. Services exports in July-Feb FY23 also grew 6.4pc to $4.197bn from $3.945bn in the year-ago period. In the coming months, these trends can be sustained.

More importantly, a solid pro-export growth strategy must be made to achieve faster yet sustainable growth in the next fiscal year and beyond.

But that strategy should rely least on offering any subsidy to goods’ exporters for which no fiscal room is available and instead focus on diversification of export destinations and more value-added export items. Some incentives may, however, be offered to exporters of services, particularly to IT and IT-enabled services exporters.

Published in Dawn, The Business and Finance Weekly, March 20th, 2023

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