A charitable view

Giving an overall view of the economy on 1st September, 2016, Governor, State Bank, Ashraf Mehmood Wathra, tried to paint a rosy picture of the recent economic developments. He said that the country has achieved an 8-year high 4.7 percent real GDP growth in FY16 compared to 2.8 percent in FY13 but Pakistan needs to increase the present rate of growth to around 7 percent to accommodate burgeoning population growth and create new job opportunities. Inflation is down to decade's low of 2.9 percent, current account deficit has shrunk to dollar 2.8 billion during FY16, foreign exchange reserves have doubled from dollar 11.1 billion to dollar 23.1 billion during the last three years and budget deficit is expected to be reduced to 4.3 percent of GDP during FY17 compared to 8.2 percent in FY13. Talking about a slowdown in remittances, the Governor said that July, 2016 numbers were low because Ramazan- and Eid-related flows had already been received in June and working days were reduced due to effective closure of businesses during the first ten days of the month. He added, nonetheless, that other countries have also experienced such declines but outlook in the case of Pakistan is positive because of a 16.3 percent increase in the number of Pakistanis proceeding abroad. Exports have fallen because of slower demand and low commodity prices in the world markets. Even rupee depreciation will not help as the slump in global demand is taking its toll. The outlook for exports is, however, improving due to improvement in power supplies, better law and order situation and commitment of the government to settle refund claims.

Pakistan's total debt and liabilities were Rs 22.5 trillion at the end of June, 2016 but all of this debt was not government's obligation. Out of this debt, Rs 2.8 trillion was non-government debt (PSE borrowings; commercial bank borrowings from abroad; debt of private firms). As of June, 2016, country's public debt stock (excluding external liabilities) was Rs 19.7 trillion, out of which domestic and foreign components were Rs 13.6 trillion and Rs 6.1 trillion, respectively. In terms of percentage, public external debt to GDP had declined from 21.3 percent in June, 2013 to 20.4 percent in June, 2016. External debt services obligations were not more than dollar 5 billion whereas Pakistan had successfully met higher debt servicing obligations in excess of dollar 6 billion in FY13 and FY14. Public sector external debt was eight times higher than the reserves of the SBP in 2013 which had just fallen to 3.2 times.

It is clear that though most of the observations of the SBP authorities (Mr Wathra and his team) were based on official data yet they seemed to be aimed at giving a positive spin to the economic indicators; all of them took great pains in doing the needful. For instance, even if we believe in the growth rate of 4.7 percent during FY16 which is disputed by almost all the independent analysts, the achievement is not very great as it would take many decades to improve the standards of living of ordinary folks. Authorities are very fond of assuring the people that the growth rate will be increased to 7 percent but this is not possible without raising the present dismal saving and investment rate. Inflation is certainly down to about 3 percent during FY16 but this was also not possible without a considerable decline in commodity prices, especially oil in the international market and overvaluation of the rupee. Once these factors are not favourable, inflationary pressures could re-emerge. Doubling of foreign exchange reserves from dollar 11.1 billion to dollar 23.1 billion would not have been possible if the government had not borrowed from all the conceivable sources. The observation of the SBP that outlook of home remittances is positive due to high number of Pakistanis going abroad seems to be unbelievable due to spending cuts and a great deal of turmoil in the Middle Eastern countries. In fact, some of the Pakistanis are presently stranded abroad without any hope of employment and looking to come back to the country as early as possible. The statement that depreciation of the rupee would not help exports is not convincing either.

Of all the observations, the one on external debt and liabilities is most confusing when the general perception is that the country is drowning in debt and there are facts to support this perception. SBP authorities have taken great pains to demonstrate that external public debt is very much manageable. The decline in its percentage to GDP has been cited to show that the problem has not worsened without realising that it is not the GDP which would automatically pay for the foreign debt servicing liabilities of the country but only export receipts, home remittances, Foreign Direct Investment, grants and other autonomous inflows could be used for the purpose. Besides, when it is claimed that the ratio of public sector external debt to foreign exchange reserves had declined, it should have also been highlighted that the present level of reserves had been reached due to excessive borrowings at a high cost to the country. The statement that Pakistan was able to meet even higher debt servicing obligations in excess of dollar 6 billion in FY13 and FY14 without mentioning that Pakistan was then constrained to go to the IMF for support and minimising this level of debt servicing liability was a desirable approach, in our view, does not convey the right message to the government. Overall, the SBP, instead of encouraging the government to borrow more through optimistic statements, should have suggested to reduce the aggregate level of debt, particularly the external debt and liabilities, by narrowing or eliminating the twin deficits and in order to have a self-reliant economy and save the future generations from excessive burden.

We may be on the right track but challenges remain. We need to know the reasons for the increase in non-oil imports. Is it due to higher or protective import regime for food items or a linkage between growth and fiscal policies? This was required from the experts in SBP. A central bank head's role is akin to hot tea; the government drinks it when it is very hot with a view to dealing with a variety of challenges in the realm of economics and finance.