Deep, deep in the debt trap
The record high fiscal deficit (Rs3.45t, 8.9pc of GDP) would have – should have, at least – set off serious alarm bells in Islamabad. It means not just that the economy has not responded despite record spending as well as record borrowing but, far more importantly, also that the IMF program might already be in danger. The deficit overshot the projected target of Rs1.9t by 82pc, seriously questioning the government’s ability to deliver on key targets and already making the federal budget document irrelevant. Let’s not forget that the bailout comes with serious conditions, failure to meet which could well jeopardise future tranches.
It is particularly alarming that total revenue collection, year-on-year, is down 6.3pc in absolute terms, which shows how much the people appreciated the PTI government’s tax policy novelty. For years, rather decades, Imran Khan claimed that people would automatically start paying taxes once he ascended the throne, simply because of his personal honesty. If numbers are to be trusted, though, it seems people placed more faith in the previous government, in its last year, to the tune of Rs230b (Rs5.33t against Rs4.9t).
Since the deficit bloated, especially in the last quarter, despite a 45pc cut in the development budget, there’s already concern that the government might now be forced to present yet another mini-budget with yet more taxes to raise revenue even if just to keep the IMF money flowing. Unless the deficit is handled, there can be no hope of stabilisation. That is why the way forward is particularly tricky; because even if the government is able to somehow enhance earnings in the ongoing fiscal, it can only be on the back of exploitative taxation instead of improved production and growth.
The high-tax, high-interest rate, low spending and weak currency environment will ensure, somewhat ironically, that there is no way of increasing productivity at least in the present electoral cycle. That is because said measures will keep aggregate demand locked in a very low band, which in turn will keep investment, manufacturing, employment, wages, growth, etc, modest at best. Not, to put it mildly, the most favourable conditions for snapping out of low growth.
News from the external sector is hardly any more encouraging. Sure, they’ve made serious advances in controlling the current account, but doing so by just restricting imports and not stimulating exports has not really been known to turn out well in the medium-to-long term. Despite losing half its value over the last year and a half, the rupee rout could only push up exports by a couple of percentage points. Also, it’s not like the international Brent crude collapse didn’t help. And soon restrictions on import of machinery will translate into yet more lethargy in production and manufacturing; perhaps that explains the negative trend in large scale manufacturing already.
The best that can be expected, really, is that this government too – like all others before it – can just manage to borrow its way till the next election, at least, and fall yet deeper in the debt trap just to stay afloat. *
Wrapping up the Afghan war, finally