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Tight economic situation

Prime Minister claims that the government has created financial discipline for the first time in the history of the country whereas current account is in surplus for the first time in last 17 years. International media is praising Pakistan on its handling of coronavirus. Government of Pakistan gave an economic stimulus package of Rs. 1,240 billion mainly to the business community by deferring their electricity bills and repayment of loans and providing concessional loans from the State Bank for retaining their employees. In addition, government also announced a wheat procurement package, which supported the agriculture sector and disbursed billions of rupees through Ehsaas program to over 15 million deserving people in a transparent and efficient manner.

In a recent media interaction; Minister for Finance has said that economy is moving in the right direction, government has controlled its expenses and in first four months of the current fiscal year, government’s income is more than its expenses, which is unprecedented. This positive development has happened due to higher tax collection and resultantly, government didn’t take new loan since July 2020. Two years back, Pakistan had the current account deficit of over USD 20 billion, which present government has first reduced it to a level of USD 3 billion in first two years of its rule and now current account is in surplus of Rs. 752 billion. As per government that they have controlled the current account balance matter permanently.

Large scale manufacturing has increased by 5 percent after a long time, cement production is also all time high, out of 20 million tons of cement production; 13 million tons have been sold in domestic market while remaining is exported. Production of cars, bikes, fertilizers, textile products is on the rise. The encouraging thing is that, Pakistan’s textile sector has export orders till December 2020. Foreign exchange reserves with the State Bank are over USD 13 billion as of today. FBR has collected more than Rs. 1,340 billion in the first four months, which is more than its target. In addition, FBR has refunded more than Rs. 128 billion in FY 2020-21, which is 100 percent more than what it had refunded in FY 2019-20.

There is zero borrowings from the State Bank, no supplemental grants being given, defense budget is capped, and expenses of Prime Minister House and Presidency have been slashed. A lucrative package has been given to the construction sector; which has positively impacted 22 other supporting sectors; Kamyab Jawan Program of Rs. 100 billion — an initiative of the present government – has started under which youth can take loans and can also start new businesses. Allocation to the public sector development program has also increased in recent months and new projects are being planned in under-developed areas of Pakistan. Exports especially textile products are on the rise and textile mills are running in full capacity.

All this doesn’t mean that all is good and economy is back on the track. Current account surplus is primarily because of less imports and even less imports of plant and equipment. There is a view that some of the measures taken by the government were either not required at this time or some of the steps were taken pre-maturely. As a matter of fact, government is in a fix these days; for the domestic consumption, it claims that economy has revived and their measures have saved the country from consequences of COVID. But when IMF comes for the review and lenders ask for their debt repayment, it has to request for concessions and present an entirely different picture of the economy, where economy is badly affected because of COVID.

There is no doubt that foreign currency remittances have increased in recent months that is mainly due to COVID. A lot of workers from the Middle East are now coming back to Pakistan and are coming with their entire savings. Moreover, due to strict restrictions and curbs on hawala and hundi; most of overseas Pakistanis are now sending through banking channels. In addition, government has incentivized foreign residents to remit their funds through the banking channels.

Though the government feels that its FX reserves position is stable but if foreign currency liabilities are adjusted from the current reserves then there is a net negative foreign exchange reserve balance of USD 7 billion. Pakistan has to return borrowed funds to Saudi Arabia and UAE in the coming months. Government has announced that it is formally approaching IMF for the resumption of talks, IMF program is technically suspended since Feb 2020 because few of the conditions of IMF were not met, which included increase in electricity and gas prices and removal of subsidies, complete autonomy of SBP and NEPRA and imposition of new taxes of over Rs. 220 billion. Due to COVID-19, government decided not to impose additional taxes and removal of subsidies in the energy sector. But now, it seems that government is interested in fulfilling these conditions. There are clear signs that FBR will not be able to achieve its targeted tax revenue. Circular debt has doubled in last two years, which is badly affecting overall financial position of the government.

While looking at the import bill of Pakistan, one wonders why billions of dollars are spent on importing luxury items, for example, luxury cars and bikes, chocolates, coffee, tea, palm oil and pan. The situation is so much alarming that now, floor tiles, switch boards, stationery items (pen, pencil, rubbers, diaries, copies), car bumpers, dairy products etc. are being imported. This import trend should be discouraged, under the terms of WTO, Pakistan cannot impose ban on importing items but there is a provision under which if a country has stress on its balance of payment then it can block such imports temporarily. The gaps are being filled from the debt, which has reached to an alarming level. Public debt to GDP ratio has crossed 106 percent of GDP, which is alarming.

Interest rates were increased from 6 to 13 percent in very short span of time, which was not even required. The intent for increasing the policy rate was to attract hot money but only a billion dollar came to Pakistan, which has now evaporated as well. COVID-19 forced the State Bank to decrease the policy rates since March 2020. Due to high interest rates; cost of doing business had increased many times, local businesses collapsed even before COVID-19 wave and it is apparently now difficult for those business to revive. Unemployment is on the rise, a lot of businesses and industries have been shut down in last few months.

Government should encourage local business houses to invest in new ventures, and tax holidays should be given to all the new industry. Pakistan will never be able to improve its economy unless it doesn’t start manufacturing electronic items and machinery. Government should provide electricity on very concessional rates if some businesses show progress in their results and to new industry. In addition, government should focus on two areas without wasting further time; to control over smuggling and other, to promote Small and Medium Enterprises (SMEs). Smuggling goods to and from Afghanistan is one of the major sources of food inflation and shortages in Pakistan. It is assessed that Pakistan needs an economic growth rate of over 7 percent to cover the gap and to ensure its unemployment remain at a reasonable level. Policy makers should focus on SMEs instead of trying to lure big business houses and large corporates. Supporting SMEs will help in revival of the economy and will create millions of jobs as well. SMEs can serve as the backbone of the economy, if these are supported by the government and banks should be encouraged to issue loans to SMEs. Some changes might be required in the prudential regulations so that banks could finance the risky areas as well.

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