Pakistan's Economy Still Not Out Of the Woods

Pakistan’s economy is still struggling despite the financial bailout of the IMF along with unlocking the door for obtaining further financial succour from friendly countries. Despite such critical financial support, the economic situation is still hanging in balance particularly in the wake of the impending elections that are widely predicted to be controversial and indecisive and may complicate the economic activity.

However, the economic managers of the country appear to be very mindful of the watchful eye of the IMF though they keep on trying to oblige their future electoral candidates by allocating amounts for the so-called development work in their constituencies.

The hanging-in-balance situation is indicated by the fact that Federal Board of Revenue (FBR) missed the collection target for July by almost Rs.2 billion amid a decline in imports.The revenue collected in the first month of the current fiscal year amounted to Rs.532 billion falling short of the projected target of Rs.534 billion.

The government has projected a revenue collection target of Rs.9.415 trillion for FY24 as against the revised collection of Rs.7.2 trillion in FY23 showing an increase of Rs.2.219 trillion or 30 per cent.The government hopes to achieve the target based on the projected economic growth of 3.5 per cent, average inflation of 21 per cent and some revenue measures.

The autonomous growth in revenue — to come from GDP growth and inflation — is projected at Rs.1.76 trillion in 2023-24. In FY23, FBR missed its annual budgetary collection target by almost Rs.522 billion or 8.83% owing to a steep decline in dutiable imports as well as poor general sales tax performance. The revenue collection reached Rs.7.118 trillion until June 27 as against Rs.7.64 trillion projected for FY23.

In the meanwhile, the government has appointed Malik Amjad Zubair Tiwana as the new chairman of the FBR. Hailing from the Inland Revenue Service, Tiwana was till recently posted as a member operation of IRS. He has replaced Asim Ahmad who was appointed by the PMLN-led coalition government on 27 April last year and he retired on 30 July. Many officers were in the run for the top position from IRS, Customs and Pakistan Administration Services but finally it was decided to appoint Tiwana to the job.

The pressure exerted by the watchful international lender and its associate agencies have resulted in the external financing of the budget deficit turned negative in the last financial year 2022-23.

This development occurred for the first time in twenty years whereby the financing of the budget deficit was done solely through domestic resources. This development also proved beneficial for the banking sector the country as the regulatory changes brought about by the central bank has barred the government from borrowing from the central bank that was actually in response to the pressure exerted by the IMF.

The consequence was that the private sector banks were provided with the chance to finance a major chunk of the huge budget deficit in the recently ended financial year that had skyrocketed in recent years.

The primary deficit is calculated after excluding the expenditures incurred on debt servicing and it is a vital yardstick in the opinion of the IMF. In this context it was mentioned that this may have occurred owing to the inability of Pakistan to revive the last Extended Fund Facility (EFF) programme of the IMF that resulted into drying down budgetary support from the multilateral and bilateral creditors and making the repayment of loans more than receiving loan monies.

Tentatively it is calculated that the external financing stood at negative Rs.682 billion in first three quarters of the last financial year and the trend showed that it continued to persist in the last and fourth quarter period of 2022-23.

Though the negative external finance deficit may be slightly encouraging but the inflation stays at high levels unabated. As usual and contrary to what is happening on the ground the official position is that inflation has decelerated but would remain elevated at 25-27 per cent in July.

This is quite a contradictory assessment as both projections just do not concur with each other. It was mentioned in this respect that the Consumer Price Index (CPI) was recorded at 29.4 per cent in June as compared to 21.3 per cent in June 2022 whereas it increased to 38 per cent in the preceding month and average CPI inflation for FY23 stood at 29.2 per cent compared to 12.2 per cent in FY22.

It was also reported that the declining international commodity prices are expected to offset the inflation spikes that emerged due to domestic supply shocks. The benchmark index of international food commodity prices declined again in June led by decreases for major cereals and most types of vegetable oils.

It was added that the government support to the agriculture sector through Kissan Package was expected to result in a better crop outlook and smoothen the domestic supplies while the expected political stability and the stable exchange rate would help to achieve price stability. Also, the input situation is expected to remain favourable during the period except for weather conditions. The basis of such assessment is clearly vague and there is a possibility that it may simply not be desirable to look at matters optimistically.

Just before the end of tenure of the coalition government, it has taken steps to approve significant development projects costing about Rs.1.22 trillion. This is quite surprising in the wake of financial stringency faced by the country but the government has gone ahead irrespective of the ground realities. Nevertheless, the projects are very ambitious in nature as they include a 1,200-megawatt nuclear power project worth Rs.1.048 trillion to be installed in Mianwali with a foreign exchange component of Rs.187 billion and Chinese supplier’s credit of Rs.821 billion whose cost has seen a 113 per cent escalation since October 2018.

The other project is dualisation of Rawalpindi-Kahuta Road spanning 28.4 kilometres to be built by National Highway Authority including a four-lane bridge over Sihala Railway pass, Sihala bypass and Kahuta bypass at a revised cost of Rs.23.55 billion on a fifty-fifty financing share by the federal and provincial governments.

Another approved project is infrastructure Up-gradation of Karachi Shipyard and Engineering Works (KSEW) project at the cost of Rs.10.69 billion with a foreign exchange component of Rs.4.935 billion.

The government also approved construction of Abdul Khel-Dhakhi-Kallurkot Road spanning 45km at the cost of Rs.14.257 billion without a foreign exchange component and will be undertaken at a 50-50 cost sharing between the federal and Khyber Pakhtunkhwa governments. The Garuk Storage Dam is also approved to be executed by Balochistan’s irrigation department in the Kharan district at an estimated cost of Rs.27.75 billion. The project is aimed at mitigating and storing floodwaters of the Garuk River and providing water for irrigation.

In its quest to garner foreign direct investment through inviting the Gulf countries to invest, the government has approved many projects including construction of Diamer-Bhasha dam and mining operations at Reko Diq in Chagai. The list of projects reveals that the government is anticipating a cumulative investment of $ 28 billion under CPEC portfolio if Gulf countries such as Saudi Arabia, Qatar, the UAE and Bahrain agree to come in.

The areas of activity in this context pertain to food, agriculture, information technology, mines and minerals, petroleum and power sectors including cattle farms, the $10 billion Saudi Aramco refinery, explorations of copper and gold in Chagai and the Thar Coal Rail connectivity scheme.

The projects may involve participation of the military establishment of Pakistan as has become evident from the reports of carrying out amendment to the Pakistan Army Act. It is also in line with the public pronouncements of the army chief who appears quite enthusiastic about overhauling the agricultural sector of the country and is willing to utilise the manpower and resources of his institution that has a good deal of experience in this area.