THE highest-ever output of cotton, a record rise of 28 per cent in production of rice, some activity in large-scale manufacturing and a big 22 per cent growth in tax revenue have come as good news in the current fiscal year.
But the bad news is that energy shortages persist, external account has weakened and inflation this year is a bit higher than in the last year.
The federal government looks set to present the next fiscal year’s budget on June 1. Finance Minister Abdul Hafeez Shaikh says the budget would be people-friendly but all efforts would be made to increase revenue.
Phasing out of subsidies from power sector continued throughout the current fiscal year to create fiscal space for tackling circular debt that is a key issue in energy crisis. Gradual withdrawal of subsidies coupled with the rise in international oil prices and intra-power-sector circular debt pushed up domestic petroleum prices. And this along with food supply constraints, chiefly due to larger exports plus poor supply chain management continued fuelling consumer inflation. The rupee depreciation due to deterioration in external account also played a part in it.
Agriculture sector performed well. The country reaped cotton harvest of 14.8 million bales—an all-time high and far above the previous record high of 14.3 million bales in FY05. Rice output surged 28 per cent and production of sugarcane also increased five per cent. In spite of abundant supply of raw cotton at cheaper rates, textile export earnings fell 10 per cent in ten months of the current fiscal year. Sluggish market conditions in the US, a double-dip recession in a larger part of Europe, disturbed law and order situation in Karachi and power shortages across the country are blamed for lower exports.
Chairman of All Pakistan Textile Mills Association Mr Mohsin Aziz, however, points out that in April 2012 textile exports went up 10 per cent over March as the industry received five-days-a-week gas supplies on priority basis.
Total export earnings in first ten months remained lower than in the same period of the last fiscal year. The factors that affected textile exports were also responsible for reduction in overall export earnings. Some non-traditional export items, however, witnessed phenomenal growth in earnings. Jewellery exports, for example, shot up more than 100 per cent to $650 million from $315 million. And export earnings of chemicals and pharmaceuticals jumped more than 25 per cent to $909 million. Exporters say full fiscal year earnings from jewellery exports is expected to cross $800 million mark and chemicals and pharmaceuticals may fetch up to $1.2 billion.
Despite these and some other success stories on exports front overall export earnings in ten months fell four per cent to a little less than $19.4 billion whereas imports crossed $37 billion mark with 15 per cent year-on-year increase. Thus, there emerged a very large trade deficit, too large to be compensated by inflows of home remittances. As a result the current account balance also went into red. This, coupled with the drying up of foreign investment and suspension of some foreign aid money (as also $1.5 billion un-disbursed amount due on the US under the Coalition Support Fund), led to a balance of payments deficit.
The deterioration in the external account and heavy external debt servicing caused the rupee to decline against the dollar particularly in the last week of May at the time of IMF loan servicing. Ministry of finance officials, however, point out that the economy “survived gracefully” for two long years May 2010 to May 2012 during which period the country did not get a single dollar from the IMF.
The suspension of the IMF loans and virtual US aid compelled the government to rely more on domestic sources for filling in budgetary gaps.
And despite a handsome increase in tax revenue generation it had to borrow excessively both from the central and commercial banks.
Excessive government borrowing from the central bank contributed to inflationary pressures and its heavy reliance on borrowings from commercial banks crowded out the private sector to some extent. But an uptick in credit demand on the back of increased activity in agriculture, a small recovery in large-scale manufacturing and expansion in some services’ sub-sectors including wholesale and retail trading doubled the off-take of private sector credit. (Between July 1, 2011 and May 11, 2012 banks’ net lending to private sector stood at Rs235 billion against that of Rs108 billion in the same period last fiscal year).
During this period, net government sector borrowing from the banking system (both from the central bank and commercial banks) crossed a trillion rupees mark from Rs506 billion in the same period of the last fiscal year. One of the key reasons for this enormous borrowing was that the federal government made a one-off ‘debt-consolidation’ of Rs391 billion to reduce the volumes of circular-debt. If this borrowing is taken into account the fiscal deficit in nine months of the current fiscal year comes to 6.1 per cent of GDP—far higher than 4.3 per cent recently reported by the ministry of finance.