Survey paints grim picture of economy

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-GDP growth shrinks by -0.38%
-Most financial growth targets missed due to pandemic
-Current account deficit curtailed by 73%
-Manufacturing sector bears the brunt

By Ali Imran

ISLAMABAD: Adviser to the Prime Minister on Finance and Revenue, Dr Abdul Hafeez Shaikh has said the country’s economy was stabilizing out coronovirus outbreak but was adversely hit by the pandemic bringing the down to GDP by 0.38 percent.Addressing at the launching ceremony of Pakistan Economic Survey for the outgoing fiscal year 2019-20 on Thursday, he said that the fiscal year 2020, before coronavirus spread, showed dedicated efforts of the government for addressing structural issues that had caused macroeconomic imbalances back in FY 2018.
The PM’s Advisor on Finance and Revenue said that the economic reforms programme and the implementation was also acknowledged by the international financial institutions while International Monetary Fund (IMF) had declared that Pakistan’s programme was on track and bearing fruits for the economy.
He said that the pre-COVID-19 economic recovery was also supported by macroeconomic indicators as on external side, the decline in current account deficit, build-up of foreign reserves and stable exchange rate.
On the fiscal side, there were significant improvements in all major indicators and the trend continued till March 2020, implying that the fiscal consolidation was on track. The primary balance had witnessed a remarkable turnaround as it had posted a surplus of Rs193.5 billion during July-March FY2020 against a deficit of Rs463.3 billion last year.
Hafeez Shaikh said that the government had repaid around Rs5,000 billion loans and was successful in reducing its expenditures, while no ministry or division was provided supplementary grant.
During this period, the Finance Advisor added that the government even did not borrow a single penny during this period from State Bank of Pakistan. In addition the revenues had also witnessed significant growth of 17 percent whereas there was also significant growth in non-tax revenues.
The provisional GDP growth rate for fiscal year 2020 is estimated at negative 0.38 per cent on the basis of 2.67, -2.64 and -0.59 per cent growth in agricultural, industrial and services sectors respectively, Adviser to the Prime Minister on Finance Hafeez Sheikh said on Thursday while unveiling the Pakistan Economic Survey 19-20.
While speaking to reporters, the PM’s adviser said the government had inherited an economy deep in debt, with depleting foreign reserves and a default looking like a possibility. The growth seen in the past government’s tenure, Sheikh said, was being achieved by taking loans from abroad and then spending it in the country.
He further revealed that growth in the agriculture sector came in at 2.6pc, but other sectors reported negative growth, industry recorded -2.64pc while services sector recorded -3.4pc growth. Transport and communication growth also came in at -7.1pc for Jul-April 2020, he said.
Sheikh said manufacturing contracted by 22.9pc year-on-year in March 2020 but added that “fiscal deficit was still manageable from July-March 2020 at 4pc of the GDP while last year it was 5.1pc of the GDP” in the same period.
Inflation
Consumer Price Index (CPI) inflation for the period July-April 2020 came in at 11.22pc against 6.51pc during the same period last year.
“Perishable food items are the main contributory factor in jacking up the food inflation,” according to the survey with inflation of 34.7pc recorded in this category.
FBR tax revenue
Overall tax collection by the Federal Board of Revenue (FBR) grew by 10.8pc to Rs3,300.6 billion during July-April 2020 against Rs2,980 billion in the comparable period last year, according to the PES document.
“The rise in tax collection is attributed to various policy initiatives implemented at the start of FY2020 such as charging sales tax on more items at the retail price under 3rd Schedule, reinstatement of taxes on telecom services and an upward revision of tax rates on various salary slabs,” the survey revealed.
But despite this increase, tax collection fell significantly below the government’s revised target of Rs3,908 billion. The target was revised from an initial Rs4,807 billion “keeping in view the economic slowdown consequent to the pandemic,” the survey said.
The survey further revealed that the pandemic had a “significant impact on revenue collection efforts of FBR”.
“During the first eight months of FY2020, FBR recorded total revenue collection of Rs2,738 billion with a growth rate of 17.5pc over last fiscal year. FBR was able to achieve 91.4pc of its (first revised) target for the period,” the survey noted.
However, after the outbreak of Covid-19 pandemic, an average negative growth rate of 13.4pc was recorded during March 2020 and April 2020 compared to last year as well as in comparison to projected collection, according to the survey.
In response to a question, Sheikh said the tax target fixed for the new fiscal year was “aspirational” but the government will not “aggressively” try to achieve it due to the current economic crisis caused by the pandemic.
Current account deficit
During July-March FY2020, current account deficit reduced by 73.1pc to $2.8 billion (1.1pc of GDP) against $10.3 billion last year (3.7pc of GDP), the survey revealed.
Exports in the said period increased 1.1pc to $18.3 billion, while imports reduced by a significant 16.2pc to $32.9 billion compared to $39.3 billion from a year ago.
This led to a shrinking of the trade deficit, which saw a reduction of 31pc to $14.7 billion in the July-March 2020 period compared to $21.3 billion last year in the same period. As a percentage of GDP, Pakistan’s trade deficit now stands at 6.6pc, considerably down from 8.5pc a year ago.
“The current account deficit that we inherited was around $20 billion but we have reduced that to around $3 billion. This is a huge achievement of the government,” remarked the PM’s aide.
According to the survey, the significant reduction in the current account deficit was “mainly reflected the impact of macroeconomic stabilisation measures undertaken over the past year, which have significantly curtailed the import demand of a wide range of non-energy and energy products”.
Reduced fiscal deficit
The fiscal deficit went down to 4pc of GDP during July-March 2020 against 5.1pc of GDP in the comparable period last year, the survey revealed. A turnaround was also visible in the primary balance — fiscal balance net of interest payments on general government liabilities — which posted a surplus of Rs194 billion during this period compared to a deficit of Rs463 billion in the year-ago period.
“Overall, the improvement in fiscal account is largely attributed to higher provincial surplus and sharp rise in non-tax revenues,” the PES document said. Sheikh, during his presser, emphasised on this development, saying a primary balance surplus was result of the government controlling state expenses.
“This was the first time, I think, in the country’s history, and our primary balance — meaning our expenses were less than our earning — went into surplus.” Sheikh said the government’s “philosophy” was to reduce the govt’s expenses and spend it on the masses.
“The whole year we did not take a single loan from the state bank, not a single govt department or ministry was given a supplementary grant because we wanted to spend the people’s money very carefully.”
He also detailed the measures taken by the government to reduce the debts and liabilities while also providing relief to the people. “Despite a small budget, we doubled the budget for the Ehsaas Programme so that the money could reach the people and the world can see that there is no political, racial or religious consideration. This was a big step,” he told the press.