No turnaround in sight

FY2018-19 may go down as one of the slowest years in recent economic history. Even when one takes into account the fact that there was a need to cool-off an over-heated economy, the actual slow-down is excessive. A number of indicators, from the closing months of last fiscal year and the start of the new, are pointing to this precarious state of the economy.

First, the GDP growth was recorded at 5.5 percent in the FY2017-8. This was highest in more than a decade. The revised growth rate for FY2018-19 released in April 2019 is estimated at 3.3 percent. However, this growth is over-estimated as is evident from the data published since then. Large-scale manufacturing (LSM) for Jul-Apr shows production declining by 3.5 percent.

The wheat crop, one of the major contributors to GDP, has fallen short of target as well as last year’s production. Against the target of 25.5 million tons, the crop is now estimated to be 24 million tons. It was for this possible shortfall in overall stocks of wheat in the country that the ECC in its last meeting imposed a ban on export of wheat. Furthermore, the latest data for the consumption of petroleum products during 2018-19 suggests a reduction of about 25 percent, with diesel consumption down by 20 percent. This is indicative of dampening economic activities, especially the reduction in diesel consumption. Diesel is the most actively used fuel for machines and engines and its reduced usage clearly points to a widespread slow-down.

Second, the balance of payments (BOP) for the full year is now available. The current account has declined to $13,587 million from $19,897 million, representing a decrease of 31 percent. In an earlier article (published: June 25, 2019), we had carried out extensive analysis of the underlying trends in the BOP for 11-month. The trends have persisted at the end of full year. The basic conclusions included: imports have not declined sufficiently; exports have shown negative growth; significant improvement in the BOP is due to unusual growth in remittances. Accordingly, more than a $1 billion/month of BOP deficit would continue to be a challenge next year.

Third, in a surprising move the monetary policy committee of the SBP has again increased the policy rate from 12.25 percent to 13.25 percent. The basic argument for this action was to fight inflation that was forecast at 13 percent by the IMF in its staff report while the SBP believes it to be in the range of 11-13 percent. This is an untenable argument. The inflation during 2018-19 averaged at 7.3 percent – and that too because there was a low base of inflation that had persisted for nearly three preceding years.

Going forward, the new inflation would face a much higher base every month of the last year and hence would require significantly more increase to match the inflation of the last year. The interest increase would also impact debt servicing cost by as much as Rs200 billion. The incentive for investment would be diluted since a risk-free investment in government securities would be giving a return as high as 15 percent return.

Fourth, the stock market is showing the most dismal performance since July 3 when the IMF programme was approved. The market has lost more than 2500 points or nearly seven percent since then. Investors’ mood is despondent. Foreigners have sold more than $700 million of equities during 2018-19. The loss of capital due to depreciation has been a rude shock to investors, who don’t seem to be returning any time soon. Until then, the market sentiment would remain damp.

Fifth, given the widespread slow-down, it is not surprising to see a weak investment outlook. The foreign investment has declined by nearly 50 percent from $3.4 billion to $1.7 billion. The credit to the private sector, a close proxy of domestic investment, witnessed a 12 percent decrease to Rs683 billion compared to Rs769 billion in 2017-18. Here again, contrary to the SBP’s worry of excess demand, we see weakening demand.

In the backdrop to such potent signs of slow-down, we are worried time is running out to affect a real turn-around in the economy. Besides the interest rate action, we have seen exchange rate volatility that doesn’t inspire markets confidence to the effect that the things are settling down. The Fund programme was to provide immediate relief in the form of restoration of economic stability. Unfortunately, stability is missing.

What is more perplexing in this regard is the continuing clash between government and business regarding the new tax procedures. There are numerous procedural matters over which businesses are not relenting. They are ready to continue to close down their businesses for days and months but will not agree with the new procedures.

There is a major disconnect between the revenue authority and taxpayers. In some measure, the issue has arisen because one set of officers negotiated the Fund programme and another set of managers is implementing it while having little knowledge of why various measures were included in the programme.

Then there were procedural matters for revenue collection which has mixed up the desire for collection with the aim of documentation. The two things should not be mixed. The government has just given an amnesty scheme and after its conclusion it should vigorously pursue the regime being introduced under the prohibition of the benami transaction law. Going after small traders and insisting to document every transaction of more than Rs50,000 is a futile exercise. There is a ‘further sales tax’ imposed on selling to such people and that is good enough contribution by such purchasers.

There have been many such attempts in the past which ended in failure and this too would likely meet the same fate. But in the meanwhile, it would lead to colossal waste of national energies as long as this issue is not resolved. Accordingly, we would strongly urge economic managers to bring this impasse to an amenable closure so that people can go to their work and begin to pay their taxes. On August 1, we will be able to see how we are performing to meet the first quarter target.

The writer is a former finance secretary. Email: waqarmkn@gmail.com