Bring the (economic) boom

WEB DESK: These days, Dar is the darling of IMF and World Bank. The Fund has so far released all eight tranches in time, barring one which was delayed due to the sit-in last year. The World Bank has recently announced a $2 billion package to be disbursed in four years.

Perceptions of the economy are improving with leading news agencies all over the world changing their lens on Pakistan to see it as an economic jewel; departing from the mantra of a security threat. Lately, an article published in Forbes is pitching Pakistan as an attractive investment opportunity for Americans. The Chinas building interest has not antagonized the USA, rather the latter is showing carrots while no visible stick is in hand. After getting $1.5 billion in the previous year, the country received first tranche of $336 million in July.

All these steps are welcomed; but there is still a long way to go to turn economic stabilization into sustainable growth momentum. Dar has left for Dubai to join ongoing talks with IMF on the eight review. The emergent problem is to control the fiscal deficit. Despite all efforts on paper and promises made to the Fund, desired results have not appeared on this front, thus far. The provisional fiscal deficit announced in the budget documents was 4.9 percent for FY15, as against the previous year deficit of 5.5 percent.

The reality seems to be different. There is an accounting gimmick of showing HBL privatization proceeds of Rs103 billion, as SBPs profits. It should rather have been part of the fiscal financing and by doing so fiscal deficit increased by 0.38 percent. The FBR revenues fell short by Rs20 billion, from the revised target, to slip the deficit by another 0.07 percent.

The bigger problem is on the non-materialization of provincial surpluses – the budget document exhibited surplus of Rs289 billion, while the actual number is a meager Rs13 billion. The difference of Rs276 billion, would have increased the deficit, by 1.01 percent. Prior action is needed for the eighth review, which is to reach agreement with the provincial finance secretaries to increase provincial budget surpluses, consistent with the Funds programme. There might be bashing on it as well. However, combining the three slippages, the fiscal deficit jumped by 1.46 percent to 6.4 percent, from provisional 4.9 percent.

How will Dar justify these numbers on the table with IMF? What promises will he make to improve the situation and what steps will he envisage to reach 4.3 percent in FY16. Its a tough task. At home, he is being hounded over the implementation of the withholding tax on all banking transactions for non-filers. Traders across the country are calling for strikes and are not ready to accept this tax.

The traders in urban Punjab are the prime vote bank of PMLN. Dar has to counter the pressure emanating from within the party to abolish this tax. But without steps like these to enhance the tax base by incentivizing non-payers to file, reaching 15 percent of tax to GDP ratio, will remain a far-fetched dream.

Now, IMF will be perusing Dar to the fiscal house in order and enhance revenues to bring the fiscal deficit under control. Still, he is home with the rest of the quantitative measures. The revised target for floor on international reserves is Rs7.3 trillion, while the actual number was Rs8.2 trillion. Similarly, ceiling on net domestic assets of SBPs target of Rs2.27 trillion, has been comfortably met; as actual number stands at Rs1.95 trillion. That has been done by net retirement of governments debt of SBP by Rs474 billion in FY15.

But it came with a cost – the onus of borrowing shifted to the scheduled banks which was Rs1.34 trillion in FY15, as against Rs106 billion, in FY14. That has crowded out private investment despite 300 bps easing, in the last eight months. The problem with the IMF programme is that it focuses only on stabilization to safeguard its loan for Balance of Payments support. But the country needs growth – as two-thirds of the 1.5 million new labour entrants remain unemployed at the prevalent growth rate of four percent.

Now, with the fiscal house in a tight spot and to meet stiff deficit targets, PSDP probably will be compromised again in FY16. Within PSDP, the governments focus is not right; allocations on power production and transmission are lower than those on road infrastructure. Education is getting worse as literacy rate fell to 58 percent, from 60 percent, last year. That is causing low productivity of labour and economy is losing its potential to grow.

Dar may come up with more promises on new taxation measures on existing tax base which may become counterproductive for a weak economy struggling to find high growth path. The bottom line is meeting IMF targets is not a problem and pleasing the World Bank is not an issue. Depressed oil prices and geopolitical shift has already taken the economy into a stabilized phase. The need is to turn this into growth. Otherwise this boom will be busted in couple of years.

Source: BR research