Fiscal policy followed during past several years was unsustainable: SBP
Business
Says record-high circular debt led to energy tariffs hikes
KARACHI (Web Desk) – The longstanding inefficiencies in the energy sector pushed power sector circular debt stock to a historic high level in the fiscal year 2022-23 [FY23], says the State Bank of Pakistan (SBP) in a latest report.
The central bank cited high operational and distribution losses, overdue capacity payments, un-targeted subsidies and delayed tariff adjustments as the reasons behind the government resorting to increasing energy tariffs on multiple times during the year “despite a decline in global energy prices during the second half of FY23”.
“This, together with less than planned fiscal consolidation and the need to boost revenues, necessitated re-imposition of Petroleum Development Levy (PDL) on petroleum products, which further stoked inflationary pressures,” reads the report titled ‘The State of Pakistan’s Economy 2022-23’.
About the challenges faced by Pakistan’s economy, the report says lingering structural weaknesses amplified the impact of successive domestic and global supply shocks of unprecedented nature.
CHALLENGES
“The country’s macroeconomic situation had already started to deteriorate since the second half of FY22 [2021-22] amid the fallout of Russia-Ukraine conflict, high global commodity prices and an unplanned fiscal expansion. The situation worsened during FY23 owing to the impact of floods, delay in the completion of the 9th review of the IMF’s EFF programme, continuing domestic uncertainty, and tightening global financial conditions,” the SBP noted while also mentioning the energy sector’s state of affairs.
According to the central bank, the combined effect of these developments led to substantial deterioration in Pakistan’s macroeconomic performance including the real GDP growth falling to the third lowest level since 1951-52 [FY52] and the consumer price index (CPI) soaring to a multi-decade high.
The SBP said although current account deficit (CAD) narrowed considerably, inadequate foreign inflows kept external account under consistent pressure, leading to a decline in SBP’s FX reserves for the second consecutive year.
At the same time, the central bank described the fiscal policy followed during the past several years as “unsustainable” which, it said, was reflected in a sharp increase in interest payments, persistently large energy subsidies and lower-than-targeted tax collection leading to less than envisaged fiscal consolidation during FY23.
PAKISTAN AND OTHER EMERGING ECONOMIES
About the external factors representing the global economy, the report says the experience in Pakistan and developments in emerging economies were not similar.
“Given the significant role played by domestic challenges, Pakistan’s macroeconomic conditions somewhat diverged from the experience of other emerging economies, especially during the second half of FY23.”
“The fallout of Russia-Ukraine conflict had further added to already strong global inflation, pushing it to multi-decade peaks around the start of FY23. In this backdrop of worsening inflationary outlooks, central banks across emerging and advanced economies had started monetary tightening since 2021.”
“The synchronous policy tightening and persistent geo-political tensions weighed down global economic activity and financial conditions during FY23.”
However, it said that the moderating demand, alongside some improvement in supply prospects, induced a downtrend in global commodity prices, especially the energy prices, for the most part of FY23.
While the headline inflation had started to ease globally, central banks continued to hike policy rates, albeit at a slower pace in the second half of FY23, amid the challenge to achieve inflation targets and persistence of underlying inflationary pressures.
This was in contrast to Pakistan’s experience, where deteriorating inflation and external account outlooks necessitated large increases in policy rate during the second half of FY23, the central states.
WHAT IS THE PROBLEM?
The SBP says Pakistan’s economic performance in FY23 highlights the importance of addressing lingering structural impediments that pose serious risks to macroeconomic stability on a recurrent basis. Foremost among these are challenges in fiscal policy reforms.
“Particularly, inadequate and slow tax policy reforms with focus on one-off quick fixes have constricted the resource envelope even for meeting current expenditures. In addition, increasing use of indirect and withholding taxes as compared to focusing on income tax, has significantly impacted both the inflation and inflation expectation.”
On the other hand, slow pace of reforms to address inefficiencies in public sector enterprises (PSEs) has led to permanent drain on fiscal resources.
“The resultant chronic fiscal imbalances have straitjacketed the government’s ability to undertake development spending required to enhance the economy’s productive capacity.”
“To put things into perspective, interest payments consumed more than half of the FBR tax collection on average during the past five years, limiting fiscal space for development spending.”
LOW-INVESTMENT TRAP
About the lack of investment, it says the scarcity of public resources to match the country’s development needs has also discouraged private investment. Hence, the country is grappling with a low-investment trap, while the growth model is mainly centred on consumption.
Meanwhile, anaemic investment in physical and human capital, as well as R&D over the last few decades has prevented development of a technology-intensive manufacturing base, which is manifested in concentration of low value-added goods in country’s exports.
In addition to sub-optimal state of human and physical capital, multifaceted factors, which are offshoots of the country’s archaic policy environment, have marred the country’s ability to generate sustained increase in exports.
WHAT SHOULD BE DONE
The report calls for broad ranging reforms to address various sectoral imbalances to ensure availability of resources for economic growth and development. It includes tax policy reforms and speedy implementation of governance reforms in PSEs, conducive environment to support foreign direct investment in exportable sectors, encouraging technology transfers and improvement in agriculture sector.
