Economic predictions

Predictions on the movement of key macroeconomic indicators based on policies under consideration/implementation are the norm as they provide a clear path to achieving specified desired targets. Multilateral agencies as and when they provide loans to support balance of payments issues and/or to support a specific poorly performing sector attach a set of time-bound structural/sector specific conditions to ensure the realisation of the mutually agreed desired goals; however economics is not an exact science and predictions can be compromised due to external and internal factors.

As long as the factors are unforeseen criticism is muted. But what if the predictions based on policy decisions are simply wrong? Then criticism can and should be brutal.

Multilaterals have been accused of flawed programme (budget support) designs internally as well as by other economists because the desired goals are not likely to be achieved due to various factors that were not considered. However, they have persistently shown a reluctance to accept blame, irrespective of their evaluation departments reporting directly to the head of the institution coming up with a more honest assessment. Two examples with respect to Pakistan come to mind. Asian Development Bank-funded Access to Justice Programme 2001 (243 million dollars from ordinary capital resources) was assessed a failure by the Bank and the government while the World Bank's performance under Tax Administration Reforms Programme (concessional funding) was declared moderately unsatisfactory while the borrower's and the government's performance was declared unsatisfactory raising questions about multilaterals' inherent bias in their own favour for if the design is flawed then the onus must also rest with the designer.

It would be remiss not to highlight yet again the International Monetary Fund's (IMF) Extended Fund Facility (2013-16) which provided tacit if not overt support to the then finance minister Ishaq Dar's flawed policy of borrowing from abroad to shore up reserves (as well as converting domestic debt with foreign debt which Dar claimed at the time was because the rate of return abroad was much lower than the domestic rate) while keeping the rupee massively over valued artificially. The then IMF mission leader was forced to admit during an exchange with the media that the reserves had risen due to the rise in debt equity and after the local Pakistani media raised the red flag on his policy to overvalue the rupee a footnote in one of the IMFs quarterly reviews mentioned that the rupee was overvalued from between 5 to 20 percent (a laughably wide margin for an institution that credits itself with hiring world's top economists).

In all fairness to the IMF the mission leader for the Standby Arrangement (2008) suspended the programme because of the failure of the Zardari-led government to implement tax and energy reforms (reforms which are a major component of the ongoing IMF programme as well) - a suspension effective around six months after Dr Hafeez Sheikh's first tenure as the country's finance minister (2010-13) began. The question arises therefore whether the current batch of IMF staff would follow the lead of the earlier EFF programme under Dar or the SBA under Sheikh? And equally pertinently would Sheikh back down again from implementing the agreed reforms to retain his portfolio?

Multilaterals when undertaking programme negotiations engage with a country's economic team that is expected to bring local constraints (economic as well as political) onto the table. Sadly Pakistan's current economic team leaders have exhibited a lack of knowledge on both counts. The team leader, Dr Hafeez Sheikh, has provided unrealistic revenue targets, expected to be revised downward, with a continued heavy reliance on indirect taxes whose incidence is greater on the poor rather than the rich, including taxes on petroleum and products, which has raised the transport costs of people and goods particularly perishables. Expenditure budgeted priorities envisage a rise of 30 percent in current and around 40 percent in development expenditure with an unsustainable deficit of 8.6 percent. While the first quarter results surprisingly show a 50 percent deficit decline, last year's deficit was 8.9 percent of GDP, yet it is unlikely that Sheikh will be able to resist disbursement of expenditure for the Prime Minister's signature social sector programme Ehsaas or continue not to disburse funding for budgeted grants and subsidies as signs of socio economic unrest become visible.

State Bank of Pakistan (SBP) has constrained productivity with a consequent negative impact on unemployment and poverty levels. Moody's report much cited recently by cabinet members has forecast that "high interest payments owing to policy rate hikes will continue to weigh on government finances and significantly constrain fiscal flexibility." Additionally, it is seeking hot money through a high discount rate (a source of financing supported by a dying breed of economists) and has mobilized one billion dollars - money that can leave the country at the press of a button. And an undervalued rupee by 5.6 percent at last count has raised cost of petroleum imports thereby raising the cost of transport for goods and passengers as well as electricity costs.

Like his predecessor Dar, Hafeez Sheikh has also been quoting foreign journals as proof of the success of his policies; one would hope that he would glance at The Economist Intelligence Unit forecast that "the combination of a heavier tax burden across the economy, weaker government spending on public services and tighter monetary policy will hamper investment and economic growth in 2019-23."

The World Bank in its October 2019 overview noted that "aided by bilateral, IMF, and other multilateral flows, international reserves have started to recover. Financial flows had a boost in FY19 due to a significant increase in central bank deposits and bilateral inflows from China, the UAE and Saudi Arabia. The approval of the IMF Extended Fund Facility in July 2019 coupled with the resumption of multilateral budget support have contributed to an increase in the international reserves to US$9.4 billion (1.9 months of import coverage) in September 2019 compared to US$7.6 billion (1.6 months of import coverage) in January 2019." Our current reserves are debt based (including the hot money inflow) reminiscent of the Dar era.

The IMF repeatedly states in its documents that if Pakistan stays the course then it would achieve stabilization but predicts low growth during the programme period (until September 2022). The question that the Khan administration needs to respond to, and which his economic team leaders are ignoring while presenting him with selective data with a highly optimistic forecast, is would the public stay the government's reform course without coming out on the streets as the economic and political costs associated with the programme are simply too high.

To conclude, the success of the first IMF review when Sheikh did not meet budgetary expenditure and revenue targets approved by the IMF, and SBP's over-correction in raising the discount rate by one percent more than was agreed with the IMF while keeping the rupee undervalued indicates that perhaps the current IMF team is following the lead set during the Dar era. Or else the next review would be a 'killer' for the public at large particularly the poor and middle income earners.