In the backdrop of worsening economic health, dwindling forex reserves, widening fiscal and current account deficits, deteriorating security situation, and falling investment-to-GDP ratio, government is finding it incredibly hard to find their way out of this quagmire. Ironically, the recent flood in Sindh province is likely to push the GDP growth rate below 4 per cent. As a consequence the living standards of millions of Pakistanis might slip further and socio-economic indicators will get worse.
The economy indeed is passing through a real stress-test. The challenges are enormous and they seem unending. On the external front, foreign exchange reserves have fallen from $18.24b to $17.17b as of today, GDP growth rate is likely to remain between 3-4 per cent, trade deficit at $2.4b (Q1), the current account deficit at $1.2b (Q1) and domestic debt at 6.2 trillion rupees.
In the absence of any good economic news, the budget deficit touched 6.3 per cent last year, which is expected to increase further in the current fiscal year if expenditures are not contained. Hence the axe has finally fallen on development expenditure, which is indeed a sad decision.
In contrast, when the economy is under severe stress-test, increase in government spending on development projects can act as strong stimuli to spur growth, create employment opportunities, and improve overall socio-economic indicators of the country. In fact, such spending works through the multiplier effect bringing many benefits to the low income group.
Contrary to that, expenditures have been cut by Rs25 billion in the first quarter of the current FY. The accumulated cut, if the trend continues all through the current FY year, could reach over Rs100b. For Q1, government had planned to release Rs75b for development projects but it has released Rs49.3b thus far to contain budget deficit in the proximity of 1 per cent of GDP in Q1. The interest payments alone have eaten up around Rs177b, defence Rs107b and grants and subsidies Rs180b. Total expenditures for the period were estimated to be around Rs574b and the actual are around Rs514b, according to federal government stats.
Expenditure on rural development has been cut by 6 per cent, social security and welfare 13 per cent, people’s works program I & II, 73 per cent, population planning 34 per cent, and low cost- housing 80 per cent.
Indeed economic resources are scarce in supply hence the government is resetting its priorities. As uncertainty looms on the face of the economy, government struggles to look for new sources to generate money to meet increasingly complex economic challenges.
It is therefore suggested that the government must focus on; injecting fresh money into the economy; try off-loading some part of both internal and external debt; improves tax collections through tightening its noose around FBR; resolving power crisis immediately to push the industrial sector back on track; adopting austerity measures; and last but not least focusing more on improving the supply side indictors of the economy instead of demand which not only have the ability to contain inflation but will also help generate employment by improving tax collections.
The author is an Islamabad based freelance contributor, a researcher and trainer. He can be reached at syed311@hotmail.com