JThe national economy suffers from a chronic disease — DEFICIT. It is grown locally and its spread cannot be contained as there is no will for it. The most important deficit is the growth deficit.
With a high population growth rate, the country needs sustained GDP growth of 7-8% to fuel it and employ the additional labor force. It was only 3.94% in FY21 which included the first six months of 2021. For the remaining six months, we have to rely on partially available data.
In October, growth in large-scale manufacturing (LSMI), the sector projected by the Planning Commission to lead growth, fell 1.19%. For the July-October period as a whole, it was 3.56%.
Exports continue to grow, by 32.8% in November and 26.7% in July-November. This achievement is accompanied by a 69.2% increase in imports, contributing massively to another deficit, the trade deficit. As the gas shortage extends to the textile sector, this over-incentive activity should also slow down.
In the agricultural sector, cotton production is expected to grow by 32.8 percent and wheat production is targeted at 28.9 million tonnes. A sudden shortage of fertilizer affects seedlings and raises the specter of a food deficit. No wonder multilateral agencies and think tanks are predicting a lower growth rate than the official target of 4.8%. Thus, the 2021 calendar year should end with a persistent growth deficit.
The root cause of the growth deficit is a persistent investment deficit. For the desired GDP growth rate, the desired investment rate is about 25% of GDP. In FY21, it was 15.2%, below 15.3% the previous year and below the target of 15.5%. In this context, the target set for the current year at 16% is only an unachievable ambition.
There is indeed a long-term decline in the investment rate. In the 1980s, it averaged 18.6% of GDP per year. By the 2010s, the average had fallen to 15.5%, incidentally the target for 2021-22. During the same period, Bangladesh’s investment rate increased from 16.1% to 29.1%. The same was true for its growth rate, from 3.5% to 6.8%.
Next comes the savings gap. Even the lamentably low investment rate, that is to say, 15.2%, is not financed by a reasonable rate of domestic savings. His contribution was a miserable 5.8 percentage points. The bulk of 9.5 percentage points was supported by net factor income from abroad, mainly remittances from Pakistanis abroad. The total, defined as national saving, exceeded investment by 0.1 percentage point because FY21 saw something unusual, a negative net inflow of external resources of 0.1% or a current account surplus.
Normally, there is a huge current account deficit. The norm had resumed in May, with FY21 posting an overall current account deficit of $1.9 billion. This is the lowest level of deficit in ten years. It was the result of a Covid-related surge in remittances. Export earnings increased by 13.7%, but import payments increased by 23.3%.
The PTI government kept delaying the compliance report. Elected on the basis of human development, he failed to meet the constitutional obligation to report annually to parliament on progress made on the principles of the policy.
The information available so far for FY22 not only suggests a resumption of traditionally high trade and current account deficits, but much worse. In the 2021-22 Annual Plan, the target set for the current account deficit was $2,276 million. In the first five months, the deficit reached $7,066 million. Imports of goods represent more than double exports and exports of services represent 67.3% of imports.
Then there is what is called the mother of all deficits, the budget deficit. In FY21, it was 7.1% of GDP. The Ministry of Finance aimed to reduce it to 6.3% in FY22. In the first quarter, the Ministry estimated that total revenue increased by 22.3%, which was significantly higher 14.5% increase in expenses.
Going through accelerated tax collection by RBF for the first five months of FY22, the goal seems achievable. So far, the collection of Rs 2.3 trillion exceeds the target of Rs 298 billion. Overall, the increase is the result of higher imports, a rapidly rising dollar and near-double-digit inflation, rather than continued reforms.
Despite this, the State Bank forecasts a deficit of around 6.3 to 7.3%. It finds that non-tax revenues have decreased due to a lower petroleum development tax and that development expenditures, grants and donations have increased significantly. This is where the mini budget prescribed by the IMF comes in to increase revenue by reducing tax exemptions worth Rs 350 billion and a reduction of Rs 200 billion in the development program.
Before the IMF drug was administered, inflation exceeded expectations. In November, the consumer price index (CPI) increased by 11.5%, the wholesale price index (WPI) increased by 27% and the sensitive price indicator (SPI) by 18, 1%. For the week ended November 16, the overall SPI was 19.5% and for the lowest income quintile it had climbed to 21.4%.
Inflation is expected to continue to accelerate as the IMF grip tightens around the neck of the economy. Contrary to the State Bank’s expectation of subdued demand, the economy is expected to experience a deceleration in growth.
A “deficit-rich” economy is obviously a heavily indebted economy. As a percentage of GDP, total debt and liabilities stood at 100.3 in June 2021. This was a significantly reduced burden from 107.3 in June 2020. In September 2021, the ratio was 93.7% compared to 94% in September 2021. total debt and external liabilities was 40.2%. Total government debt, as defined in the Fiscal Responsibility and Debt Limitation Act (FRDL), was 69% of GDP in September this year, down from 70.7% a year ago, but still above the required 60% which should have been reached at the end of June 2018.
The main explanation is that the budget deficit remains above the 4% of GDP stipulated by the FRDL. The PML(N) government had amended this law based on its prodigality. The worst part of the amendment was to remove the condition to double spending on health and education.
For its part, the PTI government has repeatedly delayed the compliance report. Elected on the basis of human development, he failed to fulfill the constitutional obligation to report annually to parliament on progress made on the principles of the policy.
The year 2021 began with government spokespersons spreading optimism that at last the economy was not only out of the woods, but finally broke from its perpetual cycle of boom and bust. However, as the country enters 2022, it is in deficit, in deficit all the way, and the government is following.
The author is a senior political economist and Chairman of the Social Science Council (COSS) of Pakistan.