Bad governance

While governments everywhere are striving to cut waste and adopt austerity as the norm, we see little thereof in Pakistan. The proof: every quarter Pakistan's Central Bank expresses its regrets at the continuing economic slide, the most worrying (and realistic) part in its latest review being doubts about the FY11 fiscal deficit not exceeding the targeted 4 percent of the GDP.
SBP's latest monetary policy statement regretted the fact that during FY10, the government exceeded even the upward revised fiscal deficit target by 0.9% of the GDP, public borrowing overshot its target by Rs 41bn, tax collection was below target by Rs 50bn, and inflation exceeded its target by 2.2 percent. But, as always, SBP didn't disclose how it tried to prevent these slippages.
This scenario resulted from accepting IMF-imposed unrealistic targets and laxity in pursuing their achievement. The triggers being blamed there for include fiscal discipline's inconsistency (or open conflict?) with the aims of economic stability, public borrowing crowding out the private sector, investment as a proportion of the GDP declining for the third consecutive year, and a demand-fuelling expansionary fiscal policy.
Failure (deliberate?) to visualise the build-up of shortages of essential food items and their blatant exploitation by market players and vested interests manifest the regime's self-proclaimed good governance, although food price increases contributed maximally to the rise in CPI because, after the rupee's slide, demand for non-food items dropped significantly.
While our parliamentarians ignore the daily protests over the above-referred slippages that manifest all round bad governance, divine accountability is on via unprecedented rains that are decimating the country's already fragile physical infrastructure (courtesy annual cuts in the PSDP and misuse of outlay on maintenance). In all likelihood, the regime would fail to recoup this damage quickly enough.
The aftermath (dislocation of massive chunks of population, epidemics, food shortages and dissent) is obvious, but the regime isn't focused on these issues. Take, for instance, the President's pointless foreign tours. Although it is too early to know the extent of damage, it could be in billions of dollars. In a world that now believes in "everyone for himself and God for us all," how Pakistan will muster the needed resources is anybody's guess.
Besides the rain-caused miseries, massive public borrowing (the bulk being wasted) with no concern for the debt it is lumbering every Pakistani with and steady contraction of the private sector, are the other disasters building up. The servicing cost of only the external debt cost $5.4 in FY10; with higher borrowing to rebuild the damaged infrastructure it could only go up unless the world realises that chaos in Pakistan could have regional impact.
This build-up goes on amid disclosures of massive frauds in public sector enterprises and the Customs that aren't being pursued effectively. Surely, money doesn't evaporate; it is pocketed by the powerful. Yet, court directives to identify, arrest, and hold the fraudsters accountable, aren't being implemented by the regime, though it claims respect for the judiciary's writ.
The biggest failure for the second year has been the quality of growth in tax revenue. Tax rate hikes, that penalise the honest in the organised sector, rather than enlarging the tax net, remain the focus. How pushed is the FBR even about tax collection is portrayed by the fact that it has advanced the cut-off date for filing tax returns by a month, ignoring the fact that Ramazan will commence from August 12.
According to SBP, indicators that required jacking-up the discount rate as an anti-inflationary measure include likely hikes in domestic electricity tariffs and petroleum prices, and coming levy of the GST (all IMF-advised), monetary impact of increased state employee wages, and continued (ie beyond the state's corrective ability) volatility in food prices.
Given this state of governance and in aftermath of the ongoing natural calamity, the above trends will surface, especially both genuine and make-believe food price increases resulting from, say, Russia banning its wheat exports. What is questionable though is the ability of higher MUP rates to retard these trends; rate hikes could worsen these trends, and restart the slide in industrial productivity that had recently been reversed.
SBP is also not realistic in assuming that, with recovery in Pakistan's economy (unlikely given SBP's above-stated fears) and forecasts of higher commodity prices, in FY11, imports may go up by 12 percent. Given the ongoing weakening of the rupee and adoption of austerity (by the masses, not the state) imports won't rise as much, provided malpractices in the Trading Corporation of Pakistan are checked and oil price stays around $80 per barrel.
The bulk of our exports consist of low-value goods whose demand hasn't fallen. Therefore, blaming uncertain recovery in Pakistan's export markets for its likely failure to record 7 percent export growth isn't fair; stumbling blocks in achieving it would be power loadshedding, inflation-driven cost increases, unrest in industrial towns, and failure to effect export shipments on time. All these issues call for good governance, which isn't visible.
SBP is right about one thing: adopting a benign outlook on workers' remittances and Coalition Support Fund inflows. But, despite bad governance, prudent risk mitigation (eg hedging against oil price rises) could contain the Current A/c deficit below SBP's projected 3.7 percent of the GDP. But, despite acknowledging that earlier rate hikes couldn't contain CPI, SBP routinely opts for it and adds to the woes of the industrial sector.
In Pakistan, with a scary rise in population and anarchy in its retail sector, food price hikes defy containing inflation with discount rate hikes; inflationary impact of the latest 0.5 percent rise therein will be far higher, courtesy market greed that will expand its multiplier effect. A minor hike in ADR could have worked better.
Industrial sector's reaction to the rate hike can't be brushed aside as the sector's traditional response to measures requiring it to do more. In reality, this sector is paying for bad governance of the state and its own tactlessness. That food prices always trigger a rise in CPI and provide SBP a justification to increase its discount rate is nothing new. Yet the FPCCI continues to have zero clout in mending the retail sector's market behaviour.
But more saddening is SBP's refusal to accept that in a scenario, marred by power loadshedding, social chaos, targeted killing of political rivals and consequent economic activity shut-downs, text-book regulatory initiatives such as discount rate hikes kill the desire to engage in economic activity, and escalate the economic chaos. It reflects bad governance all round.