Economic Survey 2022-23, unlike previous surveys, raises more questions of competence as opposed to credibility, with poor quality of economic analyses due to the overarching objective of externalizing the causes of the current severe economic impasse.
There are several obvious shortcomings in the analyses that, at worst, reflect a deliberate attempt to misinform/dupe and, at best, accept economic logic that simply does not apply to this country’s economy.
Three shortcomings stand out because, if adhered to, they are likely to deepen the existing economic paralysis because the diagnosis would disable the economic managers from applying effective remedies.
First, the claim that with “prudent and calibrated policies, the risk of default was successfully averted” with no mention of either a prudent or calibrated policy – a claim premised entirely on the successful completion of the stalled ninth review staff level agreement with the International Monetary Fund (IMF), one may be tempted to assume.
However, the subsequent reference is to strong fiscal consolidation in the way forward section of Chapter 4 “Fiscal Consolidation” which indicates that the allusion to default rather inappropriately is in terms of domestic debt rather than external debt interest/repayments as and when due – the latter being the major concern for governments. There is no mention of the possibility of default in the Public Debt chapter, which did provide an excellent platform to make a presentation on a subject that is of much concern to economists and the general public, though there is mention of debt sustainability with a list of the same age old remedies including debt rescheduling.
Default on external loans/debt equity/foreign commercial bank borrowings is imminent (though not imminent till the second quarter of next fiscal year – October-December 2023) in the event that the ninth review remains stalled.
This is in spite of the 76 percent reduction in the current account deficit however with reserves at a low of 4.09 billion dollars (26 May 2023) the continuation of existing administrative import controls (that accounted for the pile up of containers at the country’s ports as well as shortages) will continue to cripple private sector activity with large scale manufacturing (LSM) growth in March this year at negative 25 percent (with negative 8.1 percent July-March 2023) with a severe fallout on unemployment and poverty levels.
Downgrading Pakistan’s rating by the three international rating agencies has compromised the capacity to borrow from the external commercial banking sector and/or through incurring debt equity. Resistance to containing current expenditures which rose by around 75 percent this year in comparison to the year before, in spite of loud protestations of implementing austerity measures by the government, accounts for heavier than ever reliance on domestic borrowing that is crowding out private sector borrowing and fuelling inflation.
There is no doubt that the clock on the time bomb to avert sovereign default is ticking away ominously and the bomb can be defused only with the staff level agreement that will unlock other multilateral/bilateral support or through massively curtailing current expenditure which appears to be unlikely given that 2023 is an election year. This is not tantamount to an anti-Pakistan statement as claimed by Dar but an honest plea to the administration to take appropriate measures to defuse the bomb in time rather than resorting to bravado unsuccessfully.
Second, the Survey maintains that in the wake of high inflationary pressures the State Bank of Pakistan had to adopt tight monetary policies throughout the year which also impeded economic activities.
While the Survey acknowledges that there is no linkage between the discount rate and inflation yet a more honest analysis would have pointed out that the rise in the discount rate was an IMF demand based on standard economic theory of such a linkage; and instead a high discount rate reduces private sector credit which is limited to LSM, with its overwhelming linkage to raising the government’s budgeted debt servicing payments thereby raising the budget deficit, a highly inflationary policy.
Granted that the previous administration’s SBP Governor Reza Baqir acceded to the IMF demand to raise the discount rate but that may have been due to his lack of knowledge of the Pakistan economy and his long term employment with the IMF.
One would have assumed that the incumbent economic leaders would have displayed better negotiating skills to convince the Fund staff of this rather well researched feature of the economy.
And finally, the Survey notes that the removal of regionally competitive energy tariff, read the 110 billion rupees of electricity tariff announced by Dar on 6 October 2022 (coincidentally the same day that Moody’s downgraded the country’s rating) contributed to a reduction in exports is simply hogwash given that: (i) there is no empirical evidence that the two are linked.
This is evident from statistics released by the Pakistan Bureau of Statistics with total exports of 2.384 billion dollars in October 2022, 2.391 billion dollars in November, 2.323 billion dollars in December, 2.244 billion dollars in January and 2191 billion dollars in February when the government was forced to accede to the IMF demand to stop this facility; and (ii) controlling the rupee dollar parity, a flawed policy decision associated with Dar, impacted on export growth.
Some disturbing discrepancies in numbers are also noteworthy even though the statistical appendix has been severely cut to size (only three pages) with a focus on percentages rather than total figures (excepting GDP).
The claim that GDP grew by 0.29 percent in the current year is questionable when the statistical appendix indicated a GDP of 375.4 billion US dollars in 2021-22 and 341.6 billion dollars in 2022-23 (a 9 percent decline) though in rupee terms it rose from 66.6 trillion rupees to 84.7 trillion rupees (24.7 percent rise).
Household consumption the Survey notes remained unaffected by inflationary pressures though it declined as a percent of GDP from 84.85 percent last year to 83.43 percent in the current year – a decline reflecting the forced tightening of the kitchen budget as fuel and utility prices were raised, and unemployment soared.
To conclude, the Survey lacks a competent economic analysis and provides data that is geared towards showing a resilient economy rather than on a true picture that can be used to take informed policy decisions.
The Finance Minister, a man known to lack economic prowess by refusing to learn from past mistakes, which he claims as successes ad nauseum, continued the same theme: claiming successes without corroborating data and blaming his predecessors for the current impasse.
Copyright Business Recorder, 2023
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