Ministry of Finance uploaded the Monthly Economic Update and Outlook (Update) February 2021 on its website, and as has been its practice since July 2020, provided the graph of weekly economic index (WEI) sourced to Federal Reserve Bank of New York which it maintained “came to a standstill, indicating a pause in the economic recovery….the Chicago Board Options Exchange Volatility Index settled below 20 on 2 February for the first time since the pandemic took hold a year ago. The decline in VIX came as S&P 500 index rose 0.5 percent. This suggests that fear is receding from the market.” Though the 1.9 trillion dollar stimulus package was approved by the US Congress after the Update, however, the Biden White House had already proposed the package which prompted the Update to note that “coming weeks will show the effect of the stimulus package on markets, especially US.”
The growing number of Dr Hafeez Sheikh’s critics may challenge this post-pandemic citing of a graph from the website of the Federal Reserve Bank of New York and VCIX on the grounds that the US is by far the worst effected country due to the pandemic, in marked contrast to the pandemic’s outcome in Pakistan as repeatedly claimed by the Prime Minister and his fifty plus cabinet members, advisers, and special assistants and therefore its relevance to the state of our economy is nebulous at best. Had the Finance Division took the initiative to begin calculating the WEI for Pakistan it would have won across the broad bipartisan appreciation as it would have enabled the economic policy leaders to take more informed decisions.
The WEI is defined as “real economic activity using timely and relevant high-frequency data (and representing) the common component of ten different daily and weekly series covering consumer behaviour, the labor market, and production. The WEI is scaled to the four-quarter GDP growth rate; for example, if the WEI reads negative 2 percent and the current level of the WEI persists for an entire quarter, one would expect, on average, GDP that quarter to be 2 percent lower than a year previously.” If this expertise is not available in the Ministry of Finance or Pakistan Bureau of Statistics then the ministry could either begin hiring such experts or energizing the State Bank of Pakistan to begin this exercise.
Another indicator that began to be cited from July 2020 onwards was the composite monthly leading indicator (CLI) designed to “provide early signals of turning points in business cycles showing fluctuation of the economic activity around its long term potential level. CLIs show short-term economic movements in qualitative rather than quantitative terms.” The emphasis on qualitative instead of quantitative elements absolves the Ministry (as well as SBP) of failure to match claims of an improved business environment, a perception, with actual on the ground increase in productivity. This disconnect accounts for the claim of a marked improvement in the ease of doing business index (as compiled by the World Bank) while large scale manufacturing growth was negative 27 percent. And even though the World Bank has learned a valuable lesson and abandoned the calculation of ease of doing business index our economic team leaders and cabinet members continue to refer to improvement in ease of doing business as an achievement.
The January 2021 Update focused on CLI “according to monthly CLIs, December 2020, the cyclical position in Pakistan’s main exports market is improving especially in China but with a lesser degree in other market areas”; while the February focus shifted to the growth rate (which does not take account of the low base of negative 0.4 percent in 2019-20). The monthly economic indicator (MEI) combining monthly data indicators that are proven to be correlated with GDP at constant prices…scaled to align with annual GDP growth was “based on available data…(and) shows continued strong growth in January in continuation with what was observed in the previous seven months. It follows that economic growth has been strong throughout the first half of the current fiscal year and will continue to show improvement in the second half of the current fiscal year.” The Monetary Policy Statement of 19 March 2021 projects a growth rate of 3 percent however the projection of 1.5 percent by the IMF on its website subsequent to the 16 February 2021 staff agreement on the second to the fifth review maybe more accurate as it is based on the implementation of ‘prior’ and post-IMF Board approval of 24 March 2021 contractionary conditions.
There is a need for the government’s economic team leaders to strengthen their research wings to better assess/evaluate the success or otherwise of an entire range of fiscal and monetary incentives to specific sectors at a great cost to the rest of the stakeholders in the economy. For example in economic theory there is a linkage between rising exports and a cheaper currency but this linkage disturbingly has not been established in Pakistan. Since the ignominious departure of Ishaq Dar his successors notably Miftah Ismail and Asad Umer backed by SBP Governors allowed significant rupee depreciation but the impact on exports remained limited at a little more than 300 to 400 million dollars per annum. The success or otherwise of implementing a market-based rupee value - a policy component of the staff level agreement with the International Monetary Fund (IMF) reached on 12 May 2019 – rightly allows the SBP to intervene only under ‘disorderly market conditions’; however the market perception has been that the SBP intervention coincided with a budget deficit rising to even more unsustainable levels than the 2019-20 of 9.1 percent. Thus a study to determine market perception with respect to the existence of disorderly market conditions as well as identify factors that would impact favourably on our exports more effectively is required.
SBP linked the discount rate pre-pandemic to the consumer price index (CPI) at 13.25 percent (a rate that was 0.25 percent higher than the IMF projected inflation of 13 percent) from July 2019 to March 2020 while in February 2021 the discount rate is 7 percent, the CPI 8.7 percent and core inflation 6.4 percent. Thus the link between the discount rate to CPI has been abandoned which was at great cost to the economy, and the SBP has reverted to its pre-May 2019 practice of linking it to core inflation. There is a need for the cabinet to look into this matter and identify those responsible for this irresponsible policy decision and take appropriate mitigating measures with the objective of ensuring that this is never repeated.
To conclude, one would hope that the research wings of the SBP and the Ministry of Finance are strengthened to enable the policymakers to take more informed decisions than has been apparent post-May 2019.
Copyright Business Recorder, 2021
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