Underestimating challenges to economy

By all indications, the year 2011-12 has been very unsparing for Pakistan's economy. Apparently, a host of unfavourable factors like severe energy shortages, political uncertainty, fight against terrorism and increasing lawlessness had constrained the economy's ability to grow and adversely affected other economic variables to varying degrees. As against the target of 4.2 percent, the GDP growth was estimated at only 3.7 percent during 2011-12.
All the important sectors of the economy including agriculture, manufacturing and services registered lower rates of growth than their targets fixed in the beginning of the year. It needs to be mentioned that even this depressed growth (3.7 percent) was "managed" by the government by postponing the rebasing exercise of the National Income Accounts Committee which had shown a much lower GDP growth during FY12.
Developments in other areas of the economy were also distressing. Real investment which is the engine of growth was estimated to have declined from 13.1 percent of GDP last year to 12.5 percent of GDP in 2011-12. Both fixed investment and private investment fell from 11.5 percent and 8.6 percent last year to 10.9 percent and 7.9 percent respectively during the current year. Foreign direct investment during July-April, 2012 was only dollar 668 million as against dollar 1293 million in the corresponding period last year. According to the Executive Summary of the Economic Survey for 2011-12, "the capital flows were affected because of global financial crunch and eurozone crisis". During the first eleven months of the current fiscal year, broad money witnessed an expansion of 9.1 percent as compared to 11.47 percent in the same period last year. "The deceleration in money supply is primarily driven by the significant fall in Net Foreign Assets of the banking system along with increased government borrowing and a one-off settlement of circular debt." Fiscal deficit target which was projected at 4.0 percent of GDP in the beginning of the year was later revised to 4.7 percent but is now estimated to be 5.0 percent of GDP during the first ten months of 2011-12. It could go higher as the year proceeds. Inflationary pressures continue to be at intolerably high levels. The average CPI was up by 10.8 percent during July-April, 2012 as compared with the rise of 13.8 percent in the corresponding period last year. There was a complete reversal of fortunes in the external sector. With imports rising by 14.5 percent and complete stagnation in exports, current account deficit of the country stood at dollar 3.4 billion during the first ten months of the year in sharp contrast to a surplus of dollar 466 million in the corresponding period last year. This was despite a massive increase in the home remittances. If the present trend continues, current account deficit of the country could be around dollar 4.0 billion or nearly 2 percent of GDP as against a much lower target of 0.6 percent of GDP. Foreign exchange reserves of the country have dropped by about dollar 2.2 billion and exchange rate has depreciated to almost Rs 95 to a dollar in the open market. Pakistan's public debt stood at Rs 12,024 billion as of March 31, 2012, registering an increase of Rs 1,315 billion during the first nine months of the current fiscal.
However, while the economy was confronted by all sorts of challenges, authorities of the country have found a novel way to underestimate the problems by either giving a positive spin to most of the negative developments or by comparing these developments with periods which suited the government to show a better picture of the economy. Economic Survey of the government released on 31st May, 2012, a day before the budget, is full of such instances. In its Executive Summary which is often read and quoted, the Survey is completely silent on the growth targets which were fixed in the Annual Plan, and have been missed during 2011-12 but only compares the estimated growth rates for FY12 with the previous year which was marked by a very dismal performance. Similarly, it was needless to compare our growth rate with the US, Euro area and United Kingdom which are developed countries and their growth rates are traditionally low even in normal times due to very high base and lower capital output ratios. For the sake of comparison, growth rates of countries like India, Sri Lanka and China would have been much more relevant for Pakistan's economy. In the paragraph on FDI, the authors of the Survey managed to find enough space in the Executive Summary to say that capital inflows were affected because of financial crunch and eurozone crisis but failed to mention the domestic factors like acute energy shortages, rampant corruption, lack of security, increasing militancy and a bleak economic scenario which were really responsible to scare away foreign investors. These factors were probably not accorded due importance in order to conceal internal deterrents and other weaknesses of the government. An amazing ingenuity was the showing of an improved position of fiscal deficit at 5.0 percent of GDP during July-April, 2012 and comparing it with 5.5 percent in the corresponding period last year, without mentioning that fiscal deficit during the current year is going to be much higher than the target and beyond a sustainable level. The State Bank has been making a hue and cry about this adverse development and consistently advising the government to reduce its borrowings from the banking system in order to ease inflationary pressures but the Survey does not show such concern. On money and credit, authors of the Survey seemed to have discovered a new theory and attributed the deceleration in money supply primarily to a significant fall in NFA of the banking system along with increased government borrowings and a one-off settlement of circular debt. One can only wonder about the thesis of contractionary impact of increased government borrowings on the level of money supply and congratulate the authors of the Survey for finding such a new relationship between these two variables. The level of inflation has also been compared using irrelevant periods to project an easing of inflationary pressures. To highlight the improved performance, the Executive Summary says that "CPI was 10.8 percent during July-April, 2012 from a high of 25 percent in October 2008." The authorities have forgotten to mention that inflation is still at an intolerably high level of double-digit and CPI was up by 11.3 percent on year-on-year basis in April, 2012. Moreover, the inflation outlook was worsening as indicated by the rise of 1.8 percent in CPI during April, 2012 as compared to the increase of 1.2 percent in the preceding month and 1.4 percent in the corresponding month last year. By using different time periods in the Executive Summary, it was also shown that foreign exchange reserves have declined by only dollar 0.5 billion and exchange rate has depreciated by 3.4 percent. If we compare the latest data on foreign exchange reserves and exchange rate with the end-June, 2011 figures, which was the right thing to do, the situation would appear to be much worse.
In sections on population, labour force and employment, social safety nets and environment, a lot of effort has been made to show that the situation is normal and the government is planning almost tirelessly to ensure that the remaining problems are overcome in these areas sooner rather than later. As if all this positive spin was not enough, the government wants the people "to appreciate the state of economy inherited by the democratically elected government and the challenges it faced as the government presents 5th budget for the first time in the history of Pakistan." Comparing the negatives of FY2008 with the selected positives at present, the authors of the Survey have tried to remind the ordinary folk that the government's achievements are by no means ordinary. In other words, people must vote to elect the incumbent government in the coming elections to maintain the momentum of progress initiated by the present government.
Nobody can of course predict whether the present government would again be voted to power but there can be hardly any argument about the disservice the present Economic Survey has done to the credibility of the government documents. Everybody knew in the past that there could be a little bit of exaggeration in the Survey here and there not to unnecessarily annoy the government at the helms but the analysis of data and its comparison with different time periods was usually quite sophisticated and made ample sense. As such, its observations were highly regarded and its credibility was only next to State Bank's documents. After the publication of this Survey, nobody would take the government publications seriously. Domestically, who is going to believe that the real per capita income has increased, inflation has been contained, foreign sector of the economy is performing well and the social safety nets are adequate to take care of the difficulties of the common man. Authors of the Survey need to be aware that the idea of macroeconomic aggregates and their direction at a particular point of time is not only limited to books but also manifests itself in the country in the form of increase or decrease in prosperity, employment, poverty level, business activities, industrial growth, quality of road network, efficiency in education and health sectors etc Increasing suicides and robberies are also reflections of an economy nearing a stage of meltdown. Seen through this prism, everybody could visualise which way our economy is going. Twisting the facts to paint a rosy picture cannot make much difference to the abject story. One indication of the poverty of government's credibility was the deterioration of the rupee rate to Rs 95 to a dollar on the very day the Economic Survey was released. Obviously, if the picture was as satisfactory as presented in the Survey, the Pak rupee would have gained some ground. Certainly, the market is much wiser than ordinarily perceived by the government. The behaviour of IMF and other multilateral financial institutions could even be more irritating. Instead of reading the Economic Survey carefully and believing in its authenticity, they would now like to make their own calculations for their assessment which may be totally different. The treatment could be more harsh and the Economic Survey could be ignored altogether if Pakistan was serious in negotiating another programme with the Fund.
In our view, there was no use of deliberately going overboard to show a better state of the economy and be caught in a mode of self-denial. By now, all the economic analysts and almost every Tom, Dick and Harry know about the huge challenges facing the economy and throwing them under the carpet or ignoring them would only make the matters worse. Whether the Economic Survey says it or not, stagnation in incomes, marked increase in price pressures and erosion of the value of the Rupee, unemployment, poverty, increasing misery and hopelessness is evident on the faces of the people of Pakistan. Savings and investment which could provide a firm basis for revival of economic activity are dwindling fast. PSEs have almost ceased to function and are a big drain on the economy and the exchequer. Unfortunately, no restructuring or privatisation plans are being seriously contemplated to rehabilitate them and reduce their haemorrhage on the budget. It seems that even renowned foreign financial institutions which had come to the country with high hopes are now leaving for safer shores. During 2011-12, the economy, in short, has witnessed a fast downhill journey and everything seems to be written on the wall but, surprisingly, the authors of the Survey have feigned ignorance and laboured hard to find some positive signs in the economy. They are probably right in their approach for maintaining their positions or advancing their careers. Shahid Kardar, former Governor of State Bank had to leave the scene much before the expiry of his term for obvious reasons and his successor seems to be in trouble for revealing certain facts about the economy to a foreign journalist.
Such an approach has, however, never worked to get the economy out of dire straits. The purpose of presenting the Economic Survey immediately before unveiling of the annual budget had always been to inform parliamentarians and the general public about the actual position of the economy so that they are prepared in advance to mentally accept the fiscal framework for the coming year. Sadly, the present government has lost this opportunity and would now hardly be in a position to undertake harsh budgetary measures which were essential to restore macro-economic stability and avoid dependence on foreign sources of finance. We don't want to go into details but this missed opportunity could cost the country dearly in terms of high bank borrowings, intense inflationary pressures, rapid deterioration in the rupee rate, unsustainable level of debt servicing in future etc. All of this would again translate into further deprivation of the ordinary people, culminating in chaotic conditions and increasing lawlessness in the country. We are sure that the authors of the Survey were well aware of the huge problems facing the economy but they may have been tempted to play safe to avoid the ill feelings of their political bosses. If that was the strategy, they seem to have played their role extremely well to keep the people largely unaware about the current realities of the economy and its deteriorating prospects.