Winners of austerity

The economy continues to present a contrasting picture between stability and recession. The most significant sign of stability is the stemming of declining reserves, which have risen to $10.8 billion as on Dec 13 2019 — the highest since May 11, 2018 when they were recorded at $10.7 billion.

It is, however, important to note that this buildup is not a result of any structural improvement in country’s balance of payments (BOP). Much of it owes to borrowings and some foreign investment inflows.

The current account improvement owes exclusively to a 21 percent decline in imports (or about $5 billion) as opposed to a paltry growth of 4.7 percent in exports (or about $500 million) in current year. The remittances were constant at the last year level. With import demand significantly down, the pressure on the exchange rate has abetted and it also experienced some improvement. The approval of first review by the IMF Board is also a positive development, together with a very supportive assessment on the FATF.

If one looks beyond this window of stability, the economic scene is not inspiring. Inflation, high interest rate, poor tax growth, possible over-runs in expenditures, declining production in industry and agriculture and consequent adverse implications for growth, employment, poverty and income distribution are the major concerns that continue to engage analysts’ attentions. The political uncertainty and high-pitched adversarial rhetoric continue to hurt the business environment. The notable gains in the stock market have yet to be grounded in productivity gains.

For a political party whose main plank is justice, it is imperative to ask which segments of population have benefited most from its policies since it assumed office. The key policies pursued by the government have been massive devaluation, more than doubling of the interest rate, unprecedented increase in taxes and excessive increase in petroleum prices. We examine the winners and losers in each of these policies, notwithstanding the justification or otherwise of these policies.

Since June 2018, currency has been depreciated from Rs115 to Rs155, 35 percent — which is unprecedented since 1973. Devaluation is done ostensibly to improve the balance of payments: increase exports and decrease imports. What has transpired is an unbelievable contraction of imports only and virtually no response from exports. Against an import level of $61 billion in 2017-18, imports fell to $55 billion in 2018-19 and in the current fiscal year, they are down by $5 billion in the first five months. Thus a total of $11 billion worth of imports have so far been reduced. On the other hand, exports were down by about $200 million last year and have increased by $500 million in the first five months. Thus, net exports of $300 million are realized.

Undoubtedly, exporters’ income has gone up as for the same level of exports their rupee earnings have gone up. With inelastic supply, this amounts to mere transfers duly adjusted for the cost of their inputs, which in the case of textiles is quite significant as cotton itself is priced internationally. The biggest affectees are ordinary people, as the local prices of critical items have increased beyond their reach. In particular, energy prices (gas and petroleum products) and food prices (edible oil and milk) have seen significant increases.

On the interest rate, the primary and worst impact is on the government budget itself. During 2017-18, debt servicing amounted to Rs1.5 trillion, which shot up to Rs2.0 trillion in 2018-19 but has now been budgeted at Rs2.9 trillion. This means that debt servicing would be doubled in two fiscal years, with its share in federal expenditures rising from 32 percent to 47 percent. The common man is not the beneficiary of this shift in expenditure shares as it has no savings to get rewarded by the higher interest rate. The banks are the real beneficiaries whose spread has increased from 485 basis points (bps) in September 2018 to 605 pbs in September 2019, an increase of 25 percent.

But the higher interest cost has, at the same time, displaced many expenditures, most notably, development expenditure, which was down to Rs795 billion in 2018-19 from Rs890 billion in 2017-18, a reduction of about 12 percent. Also, the credit to private sector as on Dec 13, 2019 was Rs88 billion as against Rs395 billion last year. Money growth remains muted at 2.4 percent despite phenomenal build-up in reserves which is counterbalanced by sterilization of domestic credit growth which was negative at Rs254 billion compared to a positive Rs915 billion last year.

Inflation has been most hurting to the low income groups as most of it relates to food inflation. Since July, 2019, sensitive price index, tracking prices of 58 items which are most prominent in household budget, has consistently seen double-digit inflation rising as much as 20 percent for some income groups. This is a clear indication of an immediate decline in real incomes, particularly for fixed income groups who cannot demand a compensating increase in their wages.

The energy prices have affected even middle income groups. The phenomenal increase in electricity and gas prices have led to near flat demand in both these critical services and more increase in the pipeline for both these prices. Petroleum product prices have also witnessed much higher increases than justified by import prices. Petroleum levy has been raised from Rs8 and Rs10 for diesel and petrol to Rs21 and Rs17, respectively. This is nearly a 30 percent burden on these critical prices. It is not surprising to see a significant decline of about 18 percent in consumption of petroleum products as imports and local production have both declined.

Given the above picture, it needs no further elaboration that the common man has borne the brunt of austerity whereas higher income groups have seen their wealth rising. It is also not surprising that some analysts have estimated a significant uptick in poverty numbers. When growth is absent, production declines, prices rise and public spending for development and social protection is held back. We are in the midst of a recession and the worst hit are low income groups who lack a safety cushion for such adversities. A rethinking in economic policy is in order as the present framework of the Fund programme will not allow growth and thus the key promises made by the PTI for job creation and economic prosperity will remain unfulfilled.

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