The crisis was foretold

Former Deputy Governor Dr Murtaza Syed in a hard-hitting article laments that the crisis facing the economy today was ‘foretold’. He points out that ‘with just $3.7 billion left in SBP reserves, Pakistan is once again staring into the abyss’.

The citizens are already suffering under the highest inflation ever recorded and the PDM (Pakistan Democratic Movement) government policies promise to inflict even more pain in the days ahead.

Economic activity has come to a standstill with draconian measures implemented in the last nine months to ban imports, restrictions on opening L/Cs for raw materials, record high-interest rates, and super tax imposed on existing taxpayers.

We had told the powerful military establishment that although the economy was growing nicely and has weathered the commodity super cycle, the political instability caused by the vote of no-confidence against the then prime minister, Imran Khan, will lead Pakistan’s economy down this path.

Not only were the external economic conditions challenging but we also knew that the PDM government had no answers to the challenges facing the economy.

The PDM leadership was singularly focused on getting their NAB cases cleared up and given a clean chit and time has proved that our concerns were not misplaced. Today the citizens are questioning the pain and suffering inflicted on them and asking the decision makers, was this regime change worth it?

We also told the establishment in March 2022 that calling general elections was critical for the economy, as only a newly elected government with the political capital could take the tough decisions needed to continue the IMF programme. But our advice was not heeded to.

Dr Murtaza has also pointed out that we successfully concluded the IMF review in February 2022 and the programme was back on track even prior to the vote of no-confidence. He confirms that SBP reserves were around $ 17bn before the vote of no-confidence and Pakistan faced no problems in servicing its debt and liabilities.

The problems started with the removal of the Pakistan Tehrik e Insaf (PTI) government and the rudderless PDM leadership that had no interest in managing the economy and were focused on dismembering the accountability laws to give themselves a clean chit in corruption cases.

Dr Murtaza highlights that clueless PDM government wasted time and the ‘six-month delay’ in re-engaging the IMF ‘was extremely costly’.

‘The energy subsidies and other fiscal slippages saw the import bill soar and contributed to excess demand, putting severe pressure on inflation, the current account and the rupee’.

However, there are two areas of disagreement with Dr Murtaza Syed. First, regarding his views on the FY2022 Budget, which he terms ‘hyper expansionary’, are not backed by data. Fiscal operations data shows that the fiscal deficit during Jul-Mar FY22 was 3.8% of GDP, only marginally higher than 3.6% in Jul-Mar FY21. This was despite the fact that the PTI government reduced GST and PL on petroleum products to 0% and froze prices at Rs 150 on petrol and Rs 145 on diesel.

This subsidy was doled out due to the expectation that the spike in international oil prices due to the Russia-Ukraine war was temporary, and because Imran Khan’s government had approached Russia to supply discounted oil to Pakistan.

Hence, we feel the statement that the FY22 Budget was ‘hyper expansionary’ is not correct and fiscal slippages occurred post the vote of no-confidence in April 2022. In the SBP Podcast (2nd June 2022), Dr Murtaza Syed himself noted that ‘public debt increased by up to 10pc in most countries, but in Pakistan, it fell to 71% in 2022, from 77% in 2019’ due to the ‘cautious and targeted stimulus measures’.

The second disagreement with Dr Murtaza is on the stimulus measures implemented post-Covid. While in hindsight, there are many things we could have done differently.

However, the commodity super-cycle and the Russia-Ukraine conflict were risks that none of us could have predicted. Fiscal and monetary stimulus measures taken post-Covid, including the construction package, were the collective decision of all government institutions, including the SBP, and were in line with the policy responses adopted by nearly all countries to counter the impact of the COVID-induced slowdown.

These stimulus measures were critical in providing cash assistance to 15 million households (45% of total population) and financial support to small businesses through their power bills. The stimulus measures ensured that our industry was able to rebound quickly and exports grew at 27% to $ 32.5 billion, the highest-ever exports recorded in our history.

All debt repayments for private businesses were extended for one year at lower interest rates by the banks on the instructions of SBP. More than Rs 435 billion new investments were made under the SBP’s TERF facility, especially focused on the export industry.

The stimulus measures ensured no workers were laid off and instead we created nearly 2 million new jobs in FY22. For the first time since 2005, the economy achieved near 6% GDP growth for two consecutive years. Dr Murtaza stated in an interview that ‘our growth was one of the best among the Covid-hit economies. It was an amazing shock for the world. Our economy recovered quickly, and for the last two years, the growth has been about 6%”.

The rise in the import bill and the resultant increase in CAD (current account deficit) were driven by higher international commodity prices, and not as a result of fiscal policy. In December 2021, Dr Murtaza shared in the post-MPC (monetary policy committee) analyst briefing that ‘three-fifths of this increase in import bill stems from the sharp rise in global commodity prices and shipping charges’.

Dr Murtaza further stated that ‘Pakistan is not alone, there has been a sharp deterioration in CAD of most commodity-importing emerging markets’. SBP recommended that the ‘global commodity prices should normalize and one-off imports will diminish’, leading to a decline in CAD.

The PDM experiment has utterly failed and has brought the economy to the brink of collapse. Factories are shutting down and millions of workers are at risk of losing their jobs. Inflation has broken all records and with the failure of the ‘Dar peg’ a new wave of inflation has been unleashed on the public. No bilateral or multilateral development partner is willing to work with this government. We need elections immediately to get out of this colossal mess created by the PDM government.

Copyright Business Recorder, 2023