Reviewing the lacklustre performance of the economy this fiscal year, marked by exceptional growth in the agriculture sector and a drastic reduction in the balance of payments deficit, Finance Minister Muhammad Aurangzeb observed that the upcoming fiscal year would begin on a positive note. The real challenge, one may argue, lies in building upon what has been achieved.

Mr Aurangzeb’s optimism may also be strengthened by a few feel-good factors that have appeared at the tail end of the current fiscal year. For example — though not seen as enough by trade and industry leaders — the State Bank has reduced its policy rate by 150 basis points from 22 per cent to 20.5pc. Borrowers want the exchange rate to be linked to core inflation now at 14.2pc.

By bringing the entire foreign exchange activity into a regulated environment, the finance minister hoped to ensure that speculation does not come back to this country.

State Bank Governor Jameel Ahmed is reported to have said that the government has made arrangements to pay $10 billion in foreign debts over the next two months. The central bank would allocate $2bn for debt and interest payments while the process to roll over the remaining $8bn has been initiated.

The economy’s lacklustre performance, supported largely by exceptional agricultural growth, requires a sound, holistic strategy for any real GDP growth

On the eve of the budget announcement, the World Bank approved $1bn in additional financing for the Dasu Hydropower Project in Khyber Pakhtunkhwa. The funding will potentially save Pakistan an estimated $1.8bn annually by replacing imported fuels, and offset around five million tonnes of carbon dioxide.

During the current fiscal year some real progress was made in addressing external sector woes, though the sector is still not out of the woods.

To quote Mr Aurangzeb, the current account balance improved by 87.5pc, recording a deficit of $0.5bn during Jul-Mar FY24, against $4.1bn in the year-ago period. This led to the current account deficit (CAD) shrinking to 0.1pc of the GDP from 1pc during the same period last year.

“The predominant factor behind this improvement in CAD was the 25.2pc decrease in the merchandise trade deficit, which resulted from a substantial decline in import payments to $38.8bn in July-March FY24 from $42.1bn during the same period last year,” the Economic Survey stated.

Furthermore, the trade deficit also narrowed by $5bn in the first 10 months of FY24, while workers’ remittances remained robust in recent months, reaching an all-time high of $3.2bn in May 2024.

The external sector vulnerability is currently a pivotal issue that has an all-pervasive, adverse impact on socioeconomic progress, government finances, business, investment, citizens’ livelihoods, employment, etc.

While setting so many targets for solving multiple problems, as policymaking does, it should not be forgotten that in the resolution of a core issue lie the solutions for many other related problems.

One may attribute the economy’s below-expectation performance this fiscal year to two main causes. First, the policymakers projected an unrealistic economic growth rate to build misplaced hope. Second, no prudent way of achieving macroeconomic stability comes at the cost of economic growth, unemployment, and poverty. The policymakers have yet to evolve a sound strategy to achieve stability through higher real GDP growth.

It is an exceptional agricultural growth of 6.25pc this fiscal year that has primarily contributed to the GDP growth of 2.4pc — short of the annual target of 3.5pc — against a contraction of 0.17pc in the previous year.

Almost two-thirds of this recovery was attributed by the State Bank to improvement in the agriculture sector. The growth in exports was driven by increased production and high export prices of agricultural and food products.

Unlike last year’s contraction of 2.94pc, the industrial sector managed to grow by 1.21pc. And, while commodity producing sectors expanded by 4pc, the growth of the services sector declined to 1.2pc.

Investment-to-GDP ratio fell to 13.14pc from 14.13pc. To quote the survey, “both domestic and foreign investment remained dormant.”

“The SBP interest rate cut,” says an analyst, “is unlikely to unlock investments in the real sectors. However, it will substantially accrue debt payment savings to the government and bring down the financial costs of businesses.” Mark-up expenditure constituted 40pc of the total government expenditure.

Critics doubt that savings as a percentage of GDP improved to 13pc, despite an inflation rate of 26pc during July-April this year, compared to 12.6pc against 28.2pc inflation over July-April last year.

The survey notes that fiscal discipline was maintained with a fiscal deficit of 3.7pc of GDP and a primary surplus of 1.5pc of GDP. Total revenue collection grew by 41pc during July-March, 2023-24, outpacing the 36.6pc growth of total expenditure. Both tax and non-tax revenues grew by 29.3pc and 89.8pc, respectively. However, the tax system was not rationalised as the surge in revenue from direct tax was primarily collected indirectly via withholding taxes.

Published in Dawn, The Business and Finance Weekly, June 17th, 2024

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