The Accountant tells us we have arrived. Macroeconomic stability reached, next stop 'high growth trajectory'. An august assemblage of experts, our IMF Sherpa included, concurs. So who are the lesser minds to quibble? Nor is it constructive to be a rebel without cause. Shouldn't we pay homage and sit back to count the jobs that high growth will spawn and the dollars that an improved Current Account balance will save?
The fly in the ointment is the recent Budget Strategy Paper (BSP) that was presented to the Cabinet that (finally!) met on April 27. After conceding this year's growth target won't be met it gets into the default mode: self-congratulations and rosy projections. It ignores why others are forecasting lower growth rates than the Accountant's revised figure of 5% (IMF 4.5%, the dissidents 3.5%, the World Bank not 5% until 2019). It doesn't highlight the risks and mitigation measures, as a strategy paper should. It fails to spell out, as a strategy paper should, the policy measures to achieve the ambitious targets for next year - growth 6% plus, fiscal deficit below 4%, revenues up 20%, and a manageable current account deficit. Absent well-debated policy options, BSP basically says 'congratulate us if the targets are met; blame the exogenous factors if not'. Guess the naughty kaptan is part of the exogenous factors!
Notwithstanding the skimpiness of the BSP there are clues to work on. Deferment of the 9thNFC award confirms fiscal turbulence, with continued reliance on the Provinces to keep the deficit magically on target. With unremarkable GDP growth and little broadening of tax base, the projected 20% growth in tax collection means greater burden of overt or covert taxes on existing payers. Enhanced outlays for CPEC related 'investments', and greater security demands, makes loose monetary policy, over-valued exchange rate, and massive bank borrowings inevitable. Further, with all the expected outflows, plateuing of remittances, growing trade deficit, and a recalcitrant US Congress, FX reserves will need to be bolstered through fresh loans. Déjà vu?
So where is the much extolled macroeconomic stability? We thought it was all about balances -demand/output, revenue/expenditure, savings/investments, FX inflows/outflows - to 'prepare an economy for growth by buffering it against external shocks'?
To get a better handle on the holy grail of stability let's look at some determinants. The Maastricht Criteria (that bind the EU states) call for low and stable inflation, capped at 3%;long term interest rates no higher than 9%; low debt/GDP ratio, max of 60%; low fiscal deficit, limited to 3% of GDP; and currency stability, within a fluctuation range of 2.5%. Indeed, under the Maastricht Criteria Pakistan's macro-economy would appear to be stable. So what is our grouse?
It is when we lift the veil that we see the not so winsome face. When we dial-in the causes of the much touted economic turnaround we discover why the make-up won't last. Inflation has come down not as a consequence of any supply side interventions, but because of the 'base effect', some doctoring, and the drop in oil and commodity prices that can go up with the same alacrity with which they came down. The low long term interest rates are for the banks - Shabir can't get a 10-year loan for anywhere near 8.5% even if he securitizes all his columns. The debt/GDP ratio is closer to a frightening 80% if IMF definition is employed. Exchange rate stability and fiscal deficit are being 'managed', at a cost. Revenue inadequacies and tepid exports will keep both precarious. Debt servicing alone is pitched at 1.36 trillion, which will devour the whole of FBR taxes (after adjusting for transfers to Provinces).
The distance between stabilisation and growth looks even more daunting when we apply certain 'proxies'. Of the 140 countries examined WEF's competitiveness index and macroeconomic environment place us at 126 and 128 respectively. In the World Bank's Development Index (Foundations of Well-being) we rank 124th out of 187, in Ease of Doing Business 128th. Legtum Institute's Prosperity Index finds only 16 countries below us. India, with similar macroeconomic indicators, manages a growth rate north of 7%!
To suggest nothing has been achieved is as crass as the Accountant declaring victory. Of course, things are better than three years ago, and the Accountant is an intrepid fire-fighter. But firefighting is not the same as fixing. It is bad enough living in uncertain times in an interdependent world, where events happening elsewhere - commodity bubbles, slow down in major markets, exchange rate fluctuations, Fed's decisions, Chinese economy - transcend national borders like an air-borne disease. The only mitigant is domestic structural reforms, and that is what we want to see greater evidence of, not plain good luck or creative accounting. Key structural measures alone, from regulatory reforms to civil service reforms to improved governance to trade liberalisation, will ensure macroeconomic stability on a sustained basis. Let's not forget we have been there more than once: stability declared, high growth promised, and then relapse - back to IMF's intensive care unit. And IMF only palliates, sometimes playing along, as it does in its 11th review, telling us revenue target was missed by a mere 3 billion. How would the Finger move if the third umpire tells him it is more like 500 billion once you factor in the unpaid refunds and advance taxes - not to speak of the mini budget of 30 November 2015?
It may be a revelation to the Accountant but we are his well wishers, and thus urge him to spring clean his tool box. Throw out the Federal Bureau of Statistics (FBS) and State Bank tools. True independence to the central bank is the only way to get the kind of charter of economy you advocate. Free of political expediency it is the device to lend time consistency to policy direction. About FBS the Brazilian experience is instructive: Rousseff is being impeached not for corruption but for fudging the numbers. Accountant, if you are listening, discard these two tools and use the refunds tool. Give us our liquidity to get your credibility back.
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