After the political games are over, it is the economy that matters most for our future well-being. The economy is in a shambles and much reconstruction and retooling will be needed.
During the worst days of the political crisis, the rupee value and shares market plummeted. The Eurobond yield maturing in 2024 went beyond 18 per cent, and exporters tried to hold back receipts as long as possible. There was a sharp rise in debt levels, going up to Rs43 trillion. At the same time, the central bank’s reserves fell below the $12 billion mark due to the increasing trade gap and a widening current account deficit and higher debt payments.
On the external front, the trade deficit in nine months widened well above $35bn, which is much higher than the full-year budget target of $28 bn. It may be added here that he full-year trade deficit was $37 bn in 2018. The utilisation of development funds in the first nine months of the fiscal year has been much below the target – Rs405 bn against a budget allocation of Rs900 bn. Even this utilisation is mainly because of maximum use of foreign funds for development schemes — Rs80 bn against annual foreign exchange component of Rs100 bn. On the other hand, the government committed Rs31 bn out of budget in April to subsidise petroleum products for all without making an allowance for differentiation between the rich and the poor. On top of all this, circular debt has now risen to Rs3 trillion and many power plants are facing fuel shortages. PSO alone has over Rs500 bn worth of receivables.
With the political transition, the rupee has gained substantially against the dollar. The PSX has has also responded positively under the perception that the new government has historically been pro-business. There is speculation that the rally will be sustained as valuations are at multi-year lows while earnings remain resilient and dividend yields attractive. There are also expectations of a foreign policy course correction that will may help our exit from the FATF grey list and an inflow of dollars from international creditors. There are also expectations of fixed income markets rally in response to the improving outlook for external funding.
The economy faces severe challenges which have to be addressed on a priority basis. Inflation is expected to cross the 15% mark soon as high commodity prices, a weak currency and subsidy reversals will hit consumer prices hard. The new government will have limited options other than administrative measures to limit the damage. Higher interest rates in an unbanked cash economy cannot achieve much.
According to available figures, 5 billion dollars were spent from our forex reserves over the last one month, while our monthly financing needs are around one billion dollars. The new government will need to have to work hard to stem this flow to rebuild reserves quickly. Options are limited as Eurobond borrowing is prohibitively high while IMF funding requires tough decisions like increasing petrol, electricity and gas prices which the new government cannot easily take.
Apart from new fiscal measures to raise revenue, loss making SOEs will have to be privatized. Steps will also have to be taken to cut expenditures as the deficit is projected to hit an all-time high of Rs 4.3 trillion this year. Proposals have recently been formulated to increase the tax rates for salaried individuals. But this will be politically unpopular as middle income group earners have suffered a major hit to their purchasing power over the last 5 years.
Above everything, in the present circumstances, ensuring the steady supply of energy including coal, furnace oil and LNG is of prime importance. Prices for these inputs have skyrocketed amidst supply chain disruptions. Recent gains on the export front could quickly be lost if a solution is not found.
It may be mentioned here that the government has been selling petrol and diesel at about Rs150 and Rs145 per litre respectively against the landing cost of Rs175 and Rs187 per litre. This is on top of the waiver on taxes of about Rs30 per litre petroleum levy and about Rs25 per litre sales tax assumed at standard 17pc. Reversing this price trend would not be easy for the Sharif administration. Already it has shied away from the first test.
The new government faces a formidable array of challenges on the economic front. Expectations are high while the ground realities are daunting in their multifarious dimensions. It remains to be seen how the new administration moves ahead to rescue a sinking economy. It will soon find that winning the political game was easier than tackling 5he economic imbroglio.