Economic Viewpoint

Spearhead Analysis – 21.02.2019

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

Mr. Tariq Bajwa, the Governor of the State Bank of Pakistan (SBP) has categorically stated that Pakistan is out of the woods on the financial front after having received assistance from the ‘friendly’ countries. As per him the economic uncertainty has ended and the right path has been set to meet the economic challenges. It is time to be optimistic based on these comments as the lingering uncertainty seems to have ended as the nation marches towards a progressive Pakistan. The Governor explained that the issue of the current account deficit had been managed through assistance received from friendly countries that Pakistan government approached post-elections and the as a result the issue of the external deficit has been addressed. In addition, he asserted that a plan had been prepared and is being put in place to resolve the current account deficit, though it remains a hurdle as government continues to ponder over the bail-out package from the International Monetary Fund (IMF).

The reality is that Pakistan’s fiscal deficit crossed 2.7 per cent of the Gross Domestic Product (GDP) during the period July-December 2018, which is the highest in eight years. The fiscal deficit during the period amounted to Rs.1.029 Trillion, up 30 per cent over the same period of the last fiscal year. The government has cut down on its development spending and net lending by 36 per cent in an effort to manage the deficit as interest servicing increased by 32 per cent and defence expenditures rose by 22 per cent. The rise in these expenditures has left the government with little room for infrastructure development and social sector spending. This would in turn negatively impact the standard of living of the people and the growth rate of the economy in the short-to-medium term.

Six Month Performance in the first half of FY2019:

  • The total interest servicing cost was Rs.877 Billion (FY2018: Rs.751 Billion), at 2.3 per cent of GDP (FY2018: 2.1 per cent of GDP).
  • The total defence expenditure was Rs.479.6 Billion (FY2018: Rs.393 Billion), at 1.2 per cent of GDP (FY2018; 1.1 per cent of GDP).
  • The Public Sector Development Programme (PSDP) spending dipped to Rs.328 Billion (FY2018: Rs.520 Billion), down 37 per cent at 1 per cent of GDP (FY2018: 1.6 per cent of GDP).
  • The total expenditure in FY2019 was Rs.3.36 Trillion (FY2018: Rs.3.18 Trillion), up 5.5 per cent at 8.7 per cent of GDP (FY2018: 8.9 per cent of GDP).
  • The current expenditure in FY2019 was Rs.2.98 Trillion (FY2018: Rs.2.55 Trillion) up 18 per cent, at 7.8 per cent of GDP (FY2018: 7.1 per cent of GDP).
  • The total revenue collection at Rs.2.33 Trillion was 6.1 per cent of GDP in FY2019 (FY2018: 6.6 per cent of GDP at Rs.2.38 Trillion).
  • Tax revenue at Rs.2.08 trillion was 5.4 per cent of GDP in FY2019 (FY2018: 5.6 per cent of GDP at Rs.2.03 Trillion).
  • The non-tax revenue at Rs. 245 Billion was 0.6 per cent GDP in FY2019 (FY2018: 1 per cent of GDP at Rs.358 Billion).

The fact is that the financial indicators continued to deteriorate in the six months of the current fiscal year as the government focused on achieving short-term stability on the macroeconomic front. The lack of clarity on a long-term plan for economic revival is resulting in creating ongoing uncertainty, as reflected in the stagnant performance of the Pakistan Stock Exchange. While the efforts to diversify the inward investment away from China to the Middle East is a laudable step, there is a time lag till those investments materialize and there could be costs involved beyond mere economics which could have repercussions for national security. The recent incidents in Iran and India have made Pakistan a target, which could carry economic costs – India has already withdrawn the MFN status for Pakistan and imposed a 200 per cent import duty for goods from Pakistan. This will have an impact on exports from Pakistan, while India has also decided to restrict exports to Pakistan and this could in particular result in food price inflation in Pakistan through rise in price of basic staples.

Economics, politics and security are intertwined and Pakistan needs to assess its position carefully given its relatively fragile financial and economic condition. As it is inflation continues to rise translating into a higher cost of living in the face of higher prices for most commodities and utilities. The recent rating downgrades and lower growth projections are creating an environment that is not conducive for investment, as evidenced by the low levels of FDI coming into the country. It is imperative that the Government charts out a clearly spelt out long-term economic plan and that it concludes the negotiations with the IMF to start the much-needed process for reform and change, as envisioned by the PTI leadership in their pre-election rhetoric.