Doubtful beginnings

The first month of the new fiscal year is over. After three years it is the first fiscal year when an IMF programme is in place.

High hopes were pinned for the revival of the economy after its launch. Indeed, never in the past has a Fund programme been so much in the news – both because of its need as well as the unusual time taken to decide about it and the wariness shown by the government in taking that decision. It is inevitable that economic performance has to be measured from the yardsticks in the programme and also to check the signs of stability, so keenly awaited, expected from the programme.

Of course, one month is no time to pass a judgement on performance under the programme or make an assessment whether it is delivering or bringing the promised stability. Yet, whatever outcomes are emerging, they have to be contextualized within the economic policy and direction of its performance. It is with this in view that we examine a few data points on critical economic variables and survey some of the more recent developments.

The most significant outcome is the revenue collection. Against a self-selected target of Rs291 billion, the actual collection is reported at Rs278 billion. This is a 10.8 percent growth over last year’s collection of Rs251 billion. This is not a confident start as it compares quite unfavourably from the quarterly target of Rs1067 billion, which requires 32 percent growth, and the annual target of Rs5550 billion, which requires 45 percent growth. What is even more disappointing is the fact that even this poor performance is facing some reporting issues. A news report has claimed that as much as Rs24 billion of the reported Rs278 billion is not reconcilable with the treasury receipts.

We are not surprised with this revenue performance given the disarray in the budgetary process, frequent changes in the economic team and the post-budget handling of disputes with taxpayers. Those who negotiated the programme are different than those implementing it. Moreover, the minister of state who was the link in the chain was promoted to the rank of full minister and ended in a separate ministry.

The disputes with taxpayers are not just continuing but becoming intractable. The extensive rules for traders issued by the FBR one month after the budget have elicited fairly adverse reception from the belligerent taxpayers who have termed them non-serious. A two-part strike has been announced in the month of August, one adjacent to the Eid holidays and the other a week later. This is coming on the back of a steep economic slow-down where the level of domestic commerce has sharply declined. If this situation is not diffused, it may pose a grave threat to the economy.

The headline inflation for July was recorded at 10.3 percent compared to 8.9 percent in June. This has been due primarily because of the housing sector (electricity, gas and rent), which has a weight of nearly 30 percent in the index. The sector contributed about 35 percent of the increased inflation. The prices of electricity and gas were increased as part of the Fund programme while rent increase is seasonal. This was followed by food group (weight 35 percent) that contributed 29 percent of the increase, with notable price increases included: wheat (11 percent) onion (59 percent), potatoes (21 percent), tomatoes (18 percent ), pulse masoor (47 percent ), pulse mash (27 percent) and sugar (32 percent ). Much of this is also a result of budgetary measures though seasonal factors are also responsible.

Many of the contributing factors would have only a one-off effect on inflation. Despite the spike in year-on-year headline inflation, it has not affected the average inflation for the twelve-month period Aug 2018-Jul 2019 it was 7.4 percent against 7.3 percent for Jul-Jun last fiscal year. Therefore, there is no basis for keeping interest rate as high as 13.25 percent which is detrimental to investment, economic growth and employment.

A treasury bill (TBs) auction held on July 31, 2019 was under-subscribed to the extent of 40 percent (Rs887 billion were offered against the target of Rs1500 billion). This runs counter to the recently adopted policy which banned fresh government borrowings from the central bank. The unsubscribed portion would be picked up by the central bank. More importantly, 90 percent of the bids were for three-month TBs, which shows that the market remains unsettled regarding its expectation for further policy rate adjustment. This is yet another reflection of lack of stability in the economy as expectations about the key variables remain unsettled.

Perhaps the most celebratory response for the Fund programme normally comes from the stock market. But not this time. The market has given an unprecedented cold reception to its arrival. Since the day the Fund programme was approved the market has been continuously falling and is currently at the lowest point in the last one year. Last year, nearly $415 million foreign portfolio investment has exited the market. Reportedly, some small flows have arrived but their size is negligible.

The main role in this regard has been played by the high interest rates which have rendered the market quite unattractive for investment. With high return of as much as 14.25 percent available on TBs, PIBs and fixed deposits with banks and national saving schemes, the risky assets have lost their lustre. However, in this process, policymakers are missing the point that these excessive savings will not find their way into productive investments. All the money is going to the government for budgetary support, much of it in interest payments and other current expenditures – none of which have any productive returns to offer. Consequently, they will lead to further contraction of the economy with adjunct outcomes of low growth, high unemployment and rising poverty.

It is hard to find a previous occasion that can match the diffidence that pervades the economic field. The Fund programme was thought to be a panacea yet it has not injected the confidence which was expected. Gradually, doubts are rising whether the programme will be able to turn around the economy. At present, the biggest challenge is for the tax authorities to resolve the disputes with the traders’ community so that the grinded wheels of the economy start running. The economy also needs at least some good news to lift markets’ confidence. Perhaps reversing the last MPC decision of one percent interest rate increase may be that signal.

The writer is a former finance secretary.

Email: waqarmkn@gmail.com