The new economic data for the first half of the current fiscal year to December pouring in for last several days shows that the economy is stabilising, though slowly. Is it?

The numbers for the first half of the fiscal are looking up, showing slight improvement in macroeconomic imbalances.

While the headline consumer price index (CPI) inflation has been recorded just below 11 per cent for the first half of the current financial year to December from above 14 per cent a year earlier, it declined to 9.7 per cent last month.

This is for the first time that the headline inflation has declined to under 10 per cent in 42 months. The December food and non-food inflation also came down to 9.5 and 9.9 per cent, but the core inflation remained in double-digit at 10.1 per cent.

“Due to the government’s facilitation in the agriculture sector, improvement in supply situation, and reduction in the budget deficit and borrowings from the State Bank of Pakistan have helped to bring inflation down to single digit,” a statement issued by the finance ministry said after a meeting of the Monetary and Fiscal Policy Coordination Board (MFPCB) on January 19 held to review the progress made thus far on the economic front this year.

The current account balance showed a surplus of $160 million in December on rapid growth in remittances, which rose by 19.5 per cent in the first six months of the year to $6.3 billion. Overall, nevertheless, the current account deficit deteriorated to $2.154 billion or 1.8 per cent of the size of the economy in the half year from a surplus of eight million last year.

The major factor for this deterioration in the current account is the rising trade gap, which soared to $7.619 billion from $5.770 billion last year on over 19 per cent increase in imports to $19!743 billion. Exports performed better in the six months and soared by 9.1 per cent to $12.1 billion in terms of their dollar value from a year ago. Yet these dipped by 11.5 per cent last month to $1.8534 billion.

The improvement in the economic data for the last month seems to have encouraged the MFPCB to revise upwards its forecast for gross domestic product (GDP) growth to four per cent, up from an earlier downward revision to 3.6 but below the original growth target of 4.5 per cent for the year. Last year the economy had expanded by 2.4 per cent in spite of the fact that the devastating floods that submerged more than one-fifth area of the country’s territory in summer 2010 and wiped out growth equal to two percentage points.

The optimism for a better growth rate than thought earlier is based on the projections of better performance by the crop sector and the large scale manufacturing (LSM). The LSM posted a negative growth of 0.54 per cent in November after showing impressive growth in August-October. The LSM slowed to 1.56 per cent in the first five months to November from last year.

The other major positive development for the macroeconomic stability was the declining trend noticed in the government’s budget deficit, which declined to 2.6 of GDP in the first half of the year from 2.9 per cent a year earlier. The reduction in the budget deficit is attributed to the 27 per cent increase in tax revenues this year to Rs840 billion and the curtailment of the government’s expenditure to 45 per cent during the period.

This has encouraged the finance ministry to project annualised budget deficit to be around 4.7 per cent up from the original target of four per cent for the financial year.

“It will be too early to say if the government will be able to achieve its new growth and budget deficit target. I, for one, do not think so,” an economist from the Lahore School of Economics (LSE) told Dawn.

Requesting anonymity, he said the energy shortages continue to rise and restrict industrial output in Punjab, where three quarters of the largest exporting industry – textile – is located. The energy shortages, by the government’s own admission, have been wiping out at least two to three per cent of growth every year.

“How could the government achieve growth without addressing energy crunch? I do not understand. The central bank too has projected growth to fall below four per cent in its annual report for the last financial year,” the LSE economist said, also expressing his doubts about the government’s ability to contain the budget deficits below five per cent.

“The government’s debt servicing needs consumed 90 per cent of its tax resource last year. This year’s budget has estimated debt servicing payments in excess of Rs800 billion. As much is provided for the security expenditure. The expense on power subsidies (forecast to grow to Rs350 billion by the end of the fiscal) is under provided at Rs50 billion.

There is no provision in the budget for Rs45 billion to be given to the rich fertiliser makers or a few more billions to the sugar barons in cash subsidy in the name of farmers,” he said. “In these circumstances, it appears doubtful for the government to manage the budget deficit below 6.5 to seven per cent of the GDP even if it manages to meet the Rs1.95 trillion tax target for the year.”

A financial analyst working for brokerage house in Karachi agrees with the LSE economist. “What the MFPCB says appears to be an exaggerated optimism about the health of the economy. How can you expect the economy to grow at a faster rate when nobody is making any investments in it?,” he wonders.

“In spite of a reduction in the interest rates by 200bps this fiscal, the private credit has failed to show any significant improvement. The cost of borrowing is still too high. The increase in private credit uptake to Rs170 billion in the first half of the year from Rs123 billion last year, as noted by the board, is more because of meeting the working capital requirements of the borrowers rather than for the establishment of new factories or upgradation or replacement of their existing machines and technologies,” argues the analyst. “The industry is retiring its debt to reduce its expense in view of the production and revenue losses on the back of growing energy shortages.”

Moreover, he says, the government is depending a lot on the release of coalition support fund (CSF) by the United States, receipt of the remaining PTCL privatisation proceeds, and funds to be generated from the sale of five 3G telecom licences to cover its budget deficit. “If any of these funds are delayed, the budget deficit will expand further.”

Many feel that the government’s expenditure this year is going to rise in view of the elections scheduled for early next year.
“Not only that the government is going to spend more generously to please the voters and its legislators from switching sides ahead of the next election, it will more likely pursue an expansionary fiscal policy next fiscal year as well to provide relief to the voters. This may push growth, but would compromise macroeconomic stability,” he said.

He was of the view that the clever move by the government to settle circular debt of Rs160 billion through a debt swap deal with the banks outside the budget could somewhat help it keep down the deficit. But it would be too naive to expect the budget deficit to come down to the level the government hopes so.

He said the government seemed to be concerned about its deteriorating public image on different issues, including the mishandling of the sliding economy and rising energy shortages, in the election year. Hence, he said, it was trying to send a “feel good” message to its voters by projecting the numbers that showed signs of improvement in the country’s economic conditions.