Economy Bites (Sep)

Economic Progress?

The government has released a paper containing details of its two-year economic performance. This merits a fact-based comparative analysis in order to understand the true picture. The way to do this is to examine key economic indicators which the PTI government inherited from the PML-N in 2018 and study where these stand at the close of two years ending FY20.

Gross Domestic Product (GDP)

GDP growth is a key indicator as it reflects overall economic activity in a country which provides jobs opportunities, reduces poverty and increases per capita income. It declined from 5.8 percent to 1.9 percent in the first year and further slumped to negative 0.4 percent (after 68 years) at the end of second year. Global financial institutions have stated that the negative growth of 0.4 percent for FY20 has been understated by the government and it would finally end up around negative 2 percent when the revised figures will be released in due course; as the incumbent government had revised last year its official GDP growth figure of 3.3 percent for first year to 1.9 percent. The size of GDP has shrunk from $315 billion to $264 billion in two years, resulting in national income loss of $51 billion. Consequently, per capita income which had increased by 24 percent during FY14-18 to $1,652 has unfortunately reduced by 16 percent to $1,388 in two years to FY20.

Inflation

The most relevant economic indicators from a common man’s viewpoint are commodities’ prices related as these indicate inflation on the ground; in two years to FY20, consumer price index (CPI) has risen from 4 percent to 10.5 percent, wholesale price index (WPI) from 4.7 percent to 11 percent and sensitive price index (SPI) from 2.4 to 14 percent which are reflected in almost doubling of the prices of sugar, wheat flour, vegetables, pulses, medicines, natural gas and electricity. Food inflation which was less than two percent two years ago has risen to 15 percent which has caused massive unrest among the masses as millions are unable to even afford two meals a day.
PTI government’s intervention to reduce severe adverse effects of Covid-19 pandemic on people and economy has also been ineffective. Unemployment .

The number of jobless people has risen in the last two years by at least over 50 percent and the unemployment rate has risen to over 10 percent by FY20. Contrary to PTI’s promise, the government has recently terminated jobs of nearly 10,000 employees of Pakistan Steel Mills (PSM). The PTI has forgotten that PML-N tried to reform and restructure PSM and PIA in 2016 without any plan to lay-off even a single employee of both organisations, but PTI played negative politics by staging rallies in Karachi against such a plan and sponsored strikes in Karachi which ended in the loss of innocent lives. This high unemployment rate coupled with unaffordable prices of daily use commodities has caused a lot of frustration among the public.

Poverty

The PML-N government managed in its 2013-18 tenure to reduce the number of people living below the poverty line by 6 percent but this national achievement has eroded in the last two years and the poverty number has already gone back to square one. Sadly, over 10 million families have been pushed into abject poverty with even larger numbers facing food insecurity.

Social Safety Net Program

In an Islamic Republic, it is the duty of the state to look after its people who are most vulnerable and deserve financial assistance. It is with this background that the scribe proposed in May 2008 to the PPP-PML-N coalition cabinet to launch in the forthcoming budget of an income support program (later named BISP) with Rs. 34 billion which was duly announced in the federal budget for FY09. BISP allocations increased to Rs. 40 billion during PPP’s five-year tenure to FY13. The PML-N made a quantum jump of 270 percent in its support expenditure to Rs. 148 billion (BISP 124/ youth 20/ Baitulmal 4) during its tenure to FY18. Further increase in the last two years by the PTI government in social safety net support program, regardless of a rebranded name ‘Ehsas’, is a step in a positive direction.

In its 2013-18 tenure, the PML-N government managed to reduce the number of people living below poverty line by 6 percent but this national achievement has eroded in the last two years

Petroleum Products Prices:

The PTI leaders used to talk about ‘petroleum levy’ as an oppressive tax on petroleum products when they were in opposition. Taking a U-turn, it seems that one of PTI’s main items is to mobilise revenue through this levy which increased from Rs. 179 billion to Rs. 260 billion in two years and which has now been budgeted to yield an unprecedented amount of Rs. 450 billion in FY21, (that is 251 percent higher than PMLN’s FY18). This hike in levy has resulted in a huge increase in prices of petroleum products which has added to misery of people who can’t afford even the increase in prices of essential commodities and medicines. amount of Rs. 450 billion in FY21, (that is 251 percent higher than PMLN’s FY18). This hike in levy has resulted in a huge increase in prices of petroleum products which has added to misery of people who can’t afford even the increase in prices of essential commodities and medicines.

FBR Taxes Revenue

PM Imran made a public pledge to increase FBR tax revenue to Rs. 8,000 billion within one year. Against PMLN’s revenue collection increase by 97 percent to Rs. 3,842 billion in FY18, PTI’s collection for FY19 was Rs. 3,829 billion which showed negative growth after 23 years. For FY20, the official taxes collection number of Rs. 3,998 billion has been announced, but if one takes into account refunds of Rs. 101 billion made through supplementary grants coupled with outstanding SRO1125 refunds of Rs. 71 billion, the true tax revenue for FY20 is Rs. 3,827 billion; again a negative taxes collection figure. This shows pathetic performance when viewed with huge new taxation of around Rs. 900 billion by PTI in the last two years.

Public Debt

The PTI pledged to the nation to reduce the public debt by Rs. 10 trillion, which stood at Rs. 24.2 trillion at close of FY18. In reality the debt in the two years of PTI government has increased by 41 percent to Rs. 34.5 trillion, an alarming rate of increase that is far speedier than PML-N without investing in any mega visible project like that of PML-N’s power generation, motorways and highways, communication infrastructure ones. Public debt projections shared confidentially with IFIs by the government indicate that the public debt figure would increase to Rs. 47 trillion by FY23. Public debt and liabilities figures also reveal an increase of 43% from Rs. 30 trillion to Rs. 43 trillion in the last two years.

Fiscal Deficit

In its first two fiscal years, the PTI government has increased the budget deficit from Rs. 2,260 billion to Rs. 3,376 billion or from 6.6 percent to 8.1 percent of the GDP. The main reasons for such escalation are its failure to enhance taxes revenue collection and its inability to control the current account expenditure which rose by 35
percent from Rs 4,704 billion (FY18) to Rs. 6,372 billion (FY20). If the un-spent federal PSDP of Rs. 234 billion and un-utilised Covid-19 allocation of Rs. 540 billion during FY20 are taken into account,then the real fiscal deficit is Rs. 4,150 billion or 9.95 percent as against reported number of Rs3,376 billion or 8.1 percent of GDP.

Foreign Remittances (FR)

FR had increased by 43 percent to $19.9 billion in five years to FY18. These have further gone up by 16 percent to $23.1 billion in the last two years. One hopes that this upward trend continues as FR is a great contributor towards external balance of payments. Covid-19 pushed economic difficulties in most of the countries are resulting in job termination of our workforce abroad.

Current Account Deficit (CAD)

CAD was in the range of $4 billion plus annually in the FYrs14-16 and shot up to $12 billion in FY17 and $19 billion in FY18. Later two years were extraordinary as forex payments were to be made for energy projects to end 18 hours a day load shedding, CPEC and other infrastructure development related investments in addition to security related urgent payments. CAD was to come down substantially in FY19 and onwards as major one-off payments had been completed by FY18. But the way imports have been curtailed mercilessly in the last two years by imposing sky-high customs duty to improve the CAD isn’t very prudent as industrial activity has halted completely, resulting in negative -10 percent growth in large scale manufacturing (LSM) with millions of jobs redundancies and severe negative impact on overall economy.

Rupee Devaluation

The PTI government chose to follow pseudo intellectuals’ bookish theory, who were propagating a slide of rupee to $/Rs 127 to boost exports, and allowed self-slide devaluation but could not manage to handle it later. Despite that rupee-dollar parity has fallen to 168 in two years, the exports for both FY19 and FY20 have shown decline. While PML-N had insulated 92 percent of the economy (exports being 8 percent) from damage of devaluation during its tenure and got growth of 12.7 percent in exports for FY18 with targeted support, the PTI has ruined the entire economy by blindly sliding the rupee which resulted in massive inflation, closure of businesses, industrial stagnation, negative GDP growth with increased poverty and unemployment. The devaluation alone has caused national loss of Rs. 4,840 billion (equal to $29 billion) through increase in public debt in the last two years.

Policy (Interest) Rate

With improvement in macroeconomic indicators, better sovereign ratings and built up of forex reserves with stable rupee, the PMLN managed to bring down in its tenure SBP policy rate to 6.25 percent, export refinance (ERF) and long term finance facility (LTFF) to 3 percent which were lowest in decades; with core inflation at 4 percent the real interest rate was positive at 2.25 percent. In contrast to PMLN’s performance, PTI raised interest rate to 13.25 percent due to decades of high inflation triggered by massive rupee devaluation and poor economic performance. The government had been raising dollar deposits in the last two years by issuing short term sovereign paper with a 13.25 percent interest rate known as ‘Hot Money.’ This failed aspect of monetary policy alone doubled the national annual debt servicing cost from Rs. 1,500 billion to Rs. 3,000 billion and impaired the industrial activity in the country with negative 7 percent LSM growth. Following Covid-19 pandemic, the unbearable policy rate was reluctantly brought down to 7 percent in phases on this account and has naturally led to massive withdrawal of hot-money dollars deposits.

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