Back to the deficits

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If November’s 10 per cent year-on-year decline in exports and 19 per cent surge in imports fail to sound alarm bells in the finance ministry, the middle and lower income groups should brace for a particularly hazardous run-up to the elections. That the trade gap widened by 55.5 per cent in the previous month despite a healthy rise in remittances underscores the perilous fiscal state the government is about to send itself head first into. Normally, we’d take the usual argument at face value, that unusually amplified imports owe to increased raw material demand for manufacturing sector expansion in the wake of monetary expansion by the central bank. But as we have often questioned in this space, as has our panel of experts, it is difficult to expect current monetary easing to stimulate expansion when industry is operating well below capacity.
Unless existing capacity is amicably utilised, there can be no question of expansion. Plus, the interest rate regime has turned into a double-edged sword. What advantages a declining borrowing rate can deliver the private sector with the government so heavily present in the borrowing market is questionable. Furthermore, it turns out that our fears regarding international commodity prices falling, thus removing the exogenous support our exports got last fiscal, were all too real. Unfortunately, for some reason such concerns were not appreciated within the finance ministry, hence the deficit quagmire Islamabad has sleepwalked into. It is not just exports, the government’s position is compromised on most issues concerning its fiscal breathing space. Promised tax reforms are nowhere to be seen and provincial powers granted by the 18th amendment have so far been wasted. PSEs continue to unnecessarily bleed the government of billions every year, with few chances of addressing the problem. And the export base is still unimpressive, far from adequately tapping our comparative advantages. Judging by the trend, it seems the finance ministry should prepare for another round of embarrassment come budget time, when actual achievement is compared to projected targets.