ISLAMABAD – The top leadership of the government is claiming to achieve the economic stabilisation in year 2019, while the independent economic experts and masses believe that government’s policies had slowed down the business activities and increased the inflation rate to highest level in nine years.
Economic managers of the government believe they achieved economic stabilisation after averting the possible default. The government had successfully controlled the soaring current account deficit, trade deficit, and budget deficit in the second half of 2019. Similarly, it built reserves by taking new loans, increased number of tax filers and slightly enhanced exports of the country. However, the government failed to control the increasing inflation rate, achieving tax collection targets. It allowed the local currency to depreciate to record level.
On the other hand, business community remained annoyed with economic policies of the incumbent government. Leading businessmen of the country reposed their confidence in Army Chief General Qamar Javed Bajwa as they complained of a dismal economic situation and sought solution of their problems. Similarly, common people also faced increasing inflation rate that touched 9 years high level due to impact of higher energy prices and currency depreciation. Some reports suggested that Pakistan was in stagflation – a condition in which the economic growth rate is slow while unemployment and prices of goods and services are high.
To achieve the economic stabilisation, the PTI government was forced to replace its economic wizard, Asad Umar with Abdul Hafeez Shaikh, who assumed the charge of Adviser to Prime Minister on Finance and Revenue. The government also changed the heads of central bank and tax department to achieve the desired results. The government had appointed Dr Reza Baqir, a long-time economist with the International Monetary Fund (IMF), as the governor of the State Bank of Pakistan (SBP). Meanwhile, Syed Shabbar Zaidi, a Karachi-based partner in the chartered accounting firm A.F. Ferguson, was appointed as new chairman of the Federal Board of Revenue (FBR).
In January 2019, the PTI government presented its second mini-budget for last fiscal year in National Assembly, dubbing it as an economic reforms package which was needed to fix the economy. The mini budget carried encouraging tax measures for small and medium enterprises, agriculture, housing, print media industry and stock market. Despite mini-budgets, the tax collection remained one of the main challenges for the government. The FBR never achieved its monthly tax collection target in any month of the year 2019.
Launching the Economic Survey in June 2019, the PTI government had admitted to miss all economic targets including GDP growth, industrial, agriculture and others in its first year in office, 2018-19. The GDP growth had touched nine years lowest level of 3.3 percent as against the target of 6.2 percent. Similarly, the growth of the agriculture sector recorded at 0.85 percent as against the target of 3.8 percent. The industrial sector’s growth had remained at 1.4 percent as compared to target of 7.6 percent.
The PTI, who had criticised amnesty schemes in the past, introduced its first tax amnesty scheme called ‘Assets Deceleration Scheme 2019’. The scheme helped around 110,000 people to disclose their assets. The PTI-led government presented its first full-fledged budget in June 2019, which was termed tough by the stakeholders in terms of taxation. The government introduced massive taxation measures worth Rs512 billion to meet ambitious tax collection target of Rs5.555 trillion, which was set on the direction of the IMF. The militarily and civil establishment had decided to cut their budgets. The defence budget remained static at Rs1,152 billion. Similarly, the civil government reduced its expenditures by 5 percent to Rs437 billion from Rs460 billion.
In July 2019, the IMF approved a 39-month extended arrangement under the Extended Fund Facility (EFF) $6 billion loan programme for Pakistan. At the same time, the IMF Executive Board’s approval allowed immediate disbursement of about $1 billion. The remaining amount will be phased over the duration of the programme, subject to four quarterly reviews and four semi-annual reviews. The IMF approved the loan package after Pakistan accepted tough conditions of the Fund including imposing massive taxation measures in budget, increasing power tariff and gas prices, depreciating the local currency and increasing the interest rate. Following the approval of IMF’s loan, other international financial institutions like World Bank and Asian Development Bank and others had also started disbursing loans to Pakistan.
Pakistan could not manage to get its name removed from Financial Action Task Force (FATF)’s grey list in 2019. In October 2019, the FATF gave additional time to Pakistan till February 2020 to take ‘extra measures’ for ‘complete’ elimination of terror financing and money laundering. The FATF observed that Islamabad will have to take further steps in these four months. The FATF has linked the blacklisting of Pakistan with unsatisfactory steps to curb money laundering and terror financing. The FATF will make final decision in February 2020.
Pakistan has jumped up 28 places on the World Bank’s (WB) Ease of Doing Business Index and secured a place among the top 10 countries with the most improved business climate.
The incumbent government borrowed massively in last fiscal year. The federal government added Rs7.6 trillion to public debt in the last fiscal year, which skyrocketed to Rs31.8 trillion by the end of June. The federal government’s debt increased at an alarming pace of 31.3 percent due to shortfall in tax collection, uncontrolled expenditures on debt servicing and defence, and depreciation of the currency.
In major achievement, the government controlled the Current Account Deficit (CAD) that narrowed by over 31 percent in last fiscal year due to reduction in trade deficit and healthy growth in workers’ remittances. The CAD has gone down by $6.31 billion to $13.6 billion in previous fiscal year (July 2018 to June 2019) from $19.9 billion of the preceding year. The CAD is also continuously declining in current fiscal year. The country witnessed a surprise current account surplus of $70 million in October — a feat achieved after four years of deficit. During July-November, CAD clocked in at $1.821 billion, declining by a massive 73 percent over $6.733 billion in same period last year.
This consistent sharp decrease has helped the government improve its foreign currency reserves and stabilise the exchange rate. The total liquid foreign reserves held by the country stood at around $18 billion. Reserves improved due to reduction in CAD and inflow of loans from multilateral, bilateral and banking sources. Exchange rate had also stabilized after US dollar had touched highest ever Rs164 in July 2019. In December, the dollar value came down to Rs155 due to improvement in CAD and foreign exchange reserves. The government also controlled the trade deficit of the country by reducing imports and slightly increasing the exports in the previous year.
However, the inflation rate was continuously increasing due to the government’s economic policies like allowing currency depreciating in initial months of the year, increase in power and gas prices. Inflation has skyrocketed to 12.7 percent in November touching the highest level in almost nine years. The State Bank of Pakistan increased the interest rate to 13.25 percent to control the soaring inflation in last year. However, the high interest rates had affected the industrial expansion while also hurting the economic growth prospects.
Last year, the government was unable to achieve its tax collection targets despite imposing mini budgets. In fiscal year 2018-19 that ended on June 30, the FBR collected Rs3,820 billion missing the annual tax collection target by Rs578 billion. Later, in the budget for current fiscal year 2019-20, the government had set ambitious tax collection target of Rs5.55 trillion. However, the FBR is struggling to achieve the target, as it faced Rs211 billion shortfall in first five months of the current fiscal year. On the other hand, the government had increased the number of tax filers in the country. The number of tax filers increased by 0.6 million during Tax Year 2018 as number of return filers went up from 1.9 million (Tax Year 2017) to 2.5 million (Tax Year 2018). The amount received along with increased number of filers stood at Rs5 billion.
Pakistan’s budget deficit touched all-time high of Rs3.44 trillion in last fiscal year as the PTI-led government failed to enhance tax collection and reduce expenditures despite announcing two mini budgets and so-called austerity measures. However, the government controlled the budget deficit in the first quarter (July to September) of current fiscal year. Pakistan’s budget deficit was recorded at Rs286 billion during July to September period of the year 2019-20. In terms of GDP, the country’s budget deficit was recorded at 0.7 percent during the first quarter of the ongoing financial year as compared to 1.4 percent in the same period of last year.
The incumbent government failed to bring reforms in the public sector entities during last year, as the Pakistan International Airlines (PIA), Pakistan Steel Mills and others are continuously facing massive losses.