Last week, the Governor State Bank of Pakistan (SBP) discussed with a Standing Committee of the Senate the critical issues (reflected in the statistics available with the SBP) that are likely to impact the economy in the near future. Worryingly, there was little in those statistics that suggested a positive outlook.
Low tax revenue, rising negative balance of payment, and declining credit to the private sector-the major challenges that the economy confronts - were not something new but only to a minority of the senators - the lot that spends more of its time watching the trends in critical economic indicators, and less on politicking.
While press reports on this meeting didn't disclose the precise expected outflow in 2012 on account of external debt servicing, the fact that the Governor SBP sounded worried about its impact on foreign exchange reserves indicated that, compared to the outflows in the last fiscal ($5.78bn), the amount could shoot up to $6.98bn.
With foreign inflows practically frozen (net capital and financial inflows during the first five months of the current fiscal year amounting to $213 million) financing the widening current account deficit would dilute the foreign exchange reserves and weaken the exchange rate of the Rupee with its implications for inflation.
Given the worsening political and internal security scenario, and its negative impact not just on foreign inflows but also the way it will encourage flight of capital, the market is already doing what the SBP Governor fears-speeding up the depreciation of the rupee.
There are indications that capital flight is taking place because the mix of political-security risks has been worsened by the way the government has pursued the energy policy, in particular, its sudden decision to shed supply of natural gas to the industrial sector in the Punjab and Pakhtunkhwa.
While the Governor SBP has emphasised the need for doing whatever is necessary to crystallise the planned foreign inflows, in today's global economic scenario it would be over-optimistic to depend on these investment flows. The fact is that a drop in exports (courtesy an escalating mix of risks) is a far bigger threat. What was required was strengthening of the export sector's ability to produce more, at lower cost and access more export markets. But, as the senators know, the government and the parliament had precious little time for attending to these issues that threaten the economy, and may cause debt repayment defaults by Pakistan.
The Governor SBP reminded the senators that risks to macroeconomic stability emanated from fiscal weaknesses, falling foreign inflows and investment (despite a reduction in the policy rate) clearly suggested that unless the country's investment climate improves, monetary policy incentives won't yield the desired results.
This challenge required minimising pressures on the industrial sector - uninterrupted power supply, no gas loadshedding, minimum civil chaos in industrial towns, and government-to-government contacts for increasing market access for exports because investment inflows were drying up.
Indeed initiatives were undertaken to normalise trade relations with India, seek trade concession from the EU and currency swaps with Turkey and China, but the process was far too slow. Given the fact that things were worsening in the traditional export markets - the US and the EU - the regime had to work faster on other options.
In spite of political uncertainties, the business climate could be improved if the government could effectively check consumer inflation. Low inflation could build a case for lower interest rates to cut borrowing costs. Now even the SBP believes that annual inflation would remain close to 12 percent.
Oddly, with more than 50 percent items in the CPI basket showing double-digit inflation, the FBS still claims that this index stands at 9.7 percent. Even SBP's 12 percent target seems optimistic if the Rupee continues to depreciate at its current rate, and the SBP's constraints prevent market intervention to check the rupee's slide.
Imposition of penalties on market players found guilty of manipulating the exchange rate, and the fact that the SBP succeeded in addressing exchange rate volatility in the recent past by imposing market discipline may partly check the flight of capital but, as before, that won't be enough; inflation would induce the rupee's depreciation.
The rupee cost of imported energy (oil and gas) with its snowballing effect could push the CPI above 12 percent. This scenario could worsen drastically if the Persian Gulf - where Pakistan's oil suppliers are located - becomes a war zone after Iran is invaded by a joint US-Israel-British armada.
More than once, the Governor SBP pointed to the key weakness of the regime - low tax collection compared to the GDP. While it is hard to deny that both taxpayers and tax collectors play the key role in escalation of this dilemma, had the regime done what it didn't do all these years, taxpayers would have willingly paid more taxes.
Taxpayers became dishonest not just because they all were born with this defect; what made them behave that way was seeing, year after year, the blatant waste of the taxes they paid by one regime after the other while they had to buy essential civic services from private suppliers.
How clueless is the in-power regime is shown by the fact that it strives to reduce the consumption of essentials (by a population that rises by 2 percent a year) by increasing their prices; it has yet to discover that what applies to containing consumption of non-essentials doesn't apply to essentials - their supply, not price, must increase.
In this setting, the Governor SBP believes that GDP growth could still be around 3.8 per cent. Let us hope that he is proved right, but the estimates of production losses of the industrial sector during the latest turmoil in Punjab and Pakhtunkhwa, have yet to be added up; they may have caused a reduction in the GDP.
If the senators got an idea of where we are headed, they should tell their party leaders to stop competing for holding the 'biggest' public meeting. Instead, they must concentrate on remedying the flaws the Governor SBP pointed out, and begin an overdue overhaul of the system as a whole. But doing so is hoping for rationality (of which there is a huge deficit in our politicians) to prevail. In effect, it is this basic deficit that the Governor SBP was pointing to by referring to the whole variety of deficits in the economy - fiscal, trade, balance of payment, current account, energy, etc.