Last week, the SBP held an unprecedented media briefing on topical issues in Pakistan economy. Such central unscheduled media talks are usually in response to acute crisis. Today, the currency is not under pressure, reserves are healthy and interest rates are moving well in corridor.
One may wonder what triggered a media session out of nowhere. A few days ago, the SBP updated external debt numbers. Economists and columnists exhibited their concerns on rising trend in debt and SBP's responded to clarify the position.
The central bank built its argument on the public external debt in terms of GDP and that number is not scary. However, the point of concern is that in the last three years, the total rise in country's foreign reserves exactly matched the increase in the total external debt. Ironically, the SBP was silent on it.
The central bank's prime jurisdiction is to oversee the overall external balance, manage currency, and control interest rates. Public external debt is just a part of external debt and the SBP has to address the issues for the whole economy. It is the finance ministry's domain to defend the trends in public debt. The impression one gets from such a response is that, it has become a section of ministry of finance. Alas, that should not be the case.
Let's try and dissect the facts and figures presented by the SBP. There is no doubt that the macroeconomic fundamentals have improved in the past three years; thanks to windfall of low oil prices and better security and energy situation in the country. The euphoria of CPEC has played its roles as well. GDP growth averaged at 4.3 percent in FY14-16 versus 2.8 percent in FY09-13, while inflation is down from an average of 11.8 percent (FY09-13) to 5.3 percent (FY14-16). Similarly current account deficit shrunk from an average of 2.2 percent of GDP (FY09-13) to 1.0 percent of GDP (FY14-16).
The SBP talked about that total foreign reserves, which are up by $12.1billion since June 13; but was silent about the fact that total external debt increased by the exact same amount; thus washing away the windfall of low oil prices. Remittances have reached to the high on $19.9 billion in FY16 from $13.9 billion in FY13; but the SBP acted oblivion to the fact that in FY16, remittances grew by a mere 7.8 percent, as compared to a CAGR of 15.7 percent in the previous five years.
The positive outlook of home remittances is linked to the gross increase of 16.3 percent workers proceeded abroad. But that number does not incorporate the workers coming back to the country or migrating to western countries. It does not tell about quality of labour going abroad. How many of them are white collared employees? Or the increase is merely due to low skilled workers.
Lately, the news in international media is that in Middle Eastern countries, especially KSA, labour class is not getting salaries on time. How much of this contribute to slowdown in remittances during July? Analysts fear that decent chunk of remittances is an exercise of laundering money and the cleaned money routes to real estate. Since, due to renewed valuation and taxation, virtually no transaction took place in real estate market and that perhaps could be a reason of steep fall in July.
Only time would tell how much of the remittance is stuck due to halt in real estate market. Nonetheless, combining June and July numbers, remittances movement normalizes. But deceleration in FY16 growth is a hard fact and is linked to global slowdown in home remittances, as in 2015, growth in Pakistan's number exceeded most other economies.
But that argument is not enough as in the past decade, remittance is the only silver lining in current account - its growth has been largely covering the trade deficit. With no respite to trade deficit, slowdown in remittances is a fundamental challenge for Pakistan and policymakers ought to come up with a framework to counter it.
The country's exports in terms of GDP were at multi-decade low of 7.8 percent in FY16 as against the average of 11.3 percent in FY05-13 and its gravity is underplayed by the SBP. It somehow, defended the policy of sticking to exchange rate which is absurd. What is the model SBP has to keep current account balance sustainable? What is the strategy to counter both slowdown in exports and remittances?
Is the policy of keeping both appreciated exchange rate and low interest rates fruitful? To date it does not look like so, as there is no up tick in foreign investment to keep balance of payment positive without external borrowing? Next time when the SBP invites media, it would be better to address the real issues rather than keeping the problems under the carpet.
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