Economy at crossroads
HANDSOME growth in export earnings and home remittances reduced current account deficit over five months of this fiscal year. Overall balance of payments also remained surplus despite swelling import bills after the JulySeptember floods and contraction in foreign investment inflows. The rupee remained stable last month but it came under pressure this month due to endquarter external debt servicing.
Inflation in five months to November remained higher than in the same period last year due to expansion in fiscal deficit, after-effects of the floods, withdrawal of subsidies from power sector, spike in international prices of commodities and increased government borrowing from the central bank.
Tax revenue collection during July-November recorded around 10 per cent growth over the same period of 2009 but it fell short of target by Rs5 billion. The government is busy securing support of all political forces to introduce RGST and to increase revenue collection and document the economy.
Imposition of RGST, reforms in loss-making state-owned enterprises, drive against corruption and blocking of leakages in tax collection have become necessary to help the government keep its fiscal deficit within this year's target of 4.7 per cent of GDP. Data on fiscal deficit for the first half of the year would be out towards the end of the third quarter. But senior officials of the ministry of finance say that JulyDecember 2010 deficit may reach three per cent of GDP.
Constrained by lower-than-targeted tax collection amid fast-growing expenses on the war-on-terror and post-flood rehabilitation initiatives, the federal government has reduced its public sector development programme for this fiscal year from Rs280 billion to Rs150 billion. Cumulative development budget of the provinces has also been cut to Rs240 billion from Rs373 billion.
Large-scale manufacturing witnessed contraction in the first quarter and it is vulnerable to persistent power outages as well as rising interest rates.
But officials of ministry of commerce anticipate a reversal of the trend during this quarter as activities in cement, auto manufacturing, cotton and textiles, iron and steel, agriculture machinery and fertilisers have accelerated from October onwards.
On agriculture side, cotton output at 9.377 million bales till December 15, was shorter by 1.9 million bales over the same period last year. But officials of Karachi Cotton Association and Pakistan Cotton Ginners Association say, total output during the current season would not miss the post-flood revised target of 11 million bales against domestic requirement of 14 million bales.
Fall in domestic as well as global output has made cotton dearer. Spot rate on Karachi cotton market has recorded an increase of more than 40 per cent in less than six months.
The cost of producing cotton textiles has thus increased. But exporters have been able to pass on the increase in input cost to their buyers. That explains, in part, about 20 per cent increase in textile exports earnings in the five months to November.
Sugarcane crushing has begun across the country but a row over prices between growers and sugar millers has resulted in delay of cane harvesting at some places.
And that, in turn, is delaying sowing of wheat. Also, growers complain that banks are dilly-delaying disbursement of subsidised loans for farm inputs that the government had announced as part of an agricultural revival package.
The government has allowed unlimited export of wheat and wheat flour keeping in view that wheat production this year would be around 25 million tonnes-up from a little less than 24 million tonnes last year. This decision would help in boosting food export earnings and reduce the losses that the Punjab government incurs in accumulation of interests on loans acquired earlier for wheat procurement. With majority of sugar mills now crushing cane, prices of sugar have come down which should help in controlling food inflation.
Also, prices of edible oil have fallen in domestic markets after some easing in their global prices-and that too should help keep food inflation in check.
But the government borrowing from the central bank remained high in the five months to November and is still up frustrating the State Bank's move to check inflation through monetary tightening.
The Central Directorate of National Savings has introduced three-month short-term savings certificates to increase government borrowing from non-bank sources. Officials in the Central Directorate of National Savings say, sale of these certificates would start from January.
This would help the government reduce its inflationary borrowings from the central bank to some extent.
Officials of CDNS say they hope to raise at least Rs40 billion through these certificates over the second half of the current fiscal year.