This week past the presentation of budget 2012-13 and the Economic Survey 2011-12 was completely overshadowed by an interview given by the Governor of the State Bank of Pakistan (SBP) to a foreign business daily in which he made a series of statements whose impact (unfortunately negative) was greater than the combined impact of the budget and the Survey. The press release issued by the SBP the next day to control the damage was too little too late. And the rupee continues in a free-fall.
There is no question about the veracity of the statements made by the Governor (barring one namely his assertion that local banks were barred from bidding for HSBC as KASB Finance has been allowed to conduct due diligence). Will the truth set the Governor free, an aphorism that is as alien to this country's political elite as it is to the country's economic managers? There are several examples in our history which support the assertion that truth can actually cost you your job including the overnight changes in bureaucrats investigating allegations of corruption against key PPP and coalition parliamentarians. In this context it is little wonder that there is increasing speculation that the Governor of SBP may lose his job irrespective of the fact that he holds a constitutional position whereby the Executive does not have the authority to dismiss him. In contrast the Finance Minister is appointed by the Executive and there is no constitutional bar to dismissing him at a moment's notice by the Executive. However the Finance Minister is certainly higher up in the food chain relative to the Governor of the SBP and our history shows that on several occasions the Governor of SBP has been forced to resign for failing to toe the economically disastrous line proposed by the Ministry of Finance that includes printing money not backed by a rise in output and lending to a profligate government - both highly inflationary policies.
The performance of a Governor of the SBP however is not gauged by any major macroeconomic indicator while that of the Finance Minister who is accountable to parliament directly and the people of the country indirectly is. So what if there is no improvement in the performance of key macroeconomic indicators and there is little prospect that this state of affairs will change in the forthcoming fiscal year? Then a Finance Minister may be tempted to manipulate statistics and he can do this with relative ease given that both the Pakistan Bureau of Statistics (PBS) and Economic Advisor's Wing that releases the Economic Survey are under the Ministry of Finance. There have been numerous examples of data manipulation in this year alone however the most recent and disturbing one was reverting the change in the base year from 1999-2000 to 2005-06 - a decision taken in 2006 with preparatory work completed after six years. The reason: 1999-2000 year was a year when Pakistan's output plummeted for three reasons: (i) cessation of all foreign inflows in the aftermath of the nuclear blasts, (ii) capital flight due to the disastrous policy of Nawaz Sharif's government to freeze foreign accounts, and (iii) Pakistan's isolation after Musharraf's coup of October 1999. By 2005-06 foreign inflows were massive in the aftermath of 9/11, and growth rate had risen thus to take 1999-2000 as base year would show better performance in the current year than if 2005-06 was taken as the base year.
So what did the Governor SBP say in the interview that probably irked the Finance Minister the most? He averred that growth has slowed to around 3 percent - this is less than the 4 percent that Dr Sheikh claimed during the International Monetary Fund/World Bank spring meetings in April this year, 0.2 percent less than the PBS calculation based on 2005-06 base year and 0.7 percent less than the PBS estimate after being compelled to revert to the 1999-2000 base year by Dr Sheikh which was as expected inducted in the Economic Survey. The Governor also claimed that the budget deficit for the current year is 8 percent of GDP against government acknowledgement of around 4.9 percent only.
However the Governor did not stop there. He also referred to poor ongoing policies and expressed pessimism about the future. He acknowledged that "there are many serious challenges" and "I have a rough job here." The challenges he identified were (i) next year reserves will go down quite aggressively with rising oil prices, plummeting price of our major export earner cotton and a foreign investment fall of 500 million dollars from annual levels of 8 billion dollars a few years ago because of Taliban insurgency and macroeconomic instability; (ii) government failed to get a massive budget and mounting trade deficit under control; (iii) tax to Gross Domestic Product ratio is way below where it should be (at around 9 percent); (iv) government has borrowed 442 billion rupees from the State Bank, and is crowding out private sector credit by borrowing from the commercial banking sector as well; (v) low foreign investment is a real challenge; and (vi) inflation currently hovering at 11 percent will pick up in a month or two. While the Governor did not explain why it is fairly safe to assume that he was referring to not the claims made in the budget 2012-13 documents (which is now regarded as an accounting exercise and left few with the view that it would be adhered to this time around unlike in the past) without a commensurate increase in revenue (no new taxes) that would increase the deficit and the government reliance on borrowing from the SBP. The resulting decline in the rupee value vis-a-vis major currencies was therefore no surprise to anyone.
Credibly the Governor did note some positive aspects of the economy namely the rise in remittance income (20 percent rise) and the currency swap agreed with Turkey and China. He also assured that SBP would not intervene in the foreign currency market and would not repay IMF loans of about 4 billion dollars due in 2012-13 by buying US dollars but instead run down foreign reserves which would drop to around 8 billion rupees as a consequence or enough for two months of imports. What was the Governor's solution? He accepted that "I still have autonomy but not enough to bounce a check" from the government and admitted his inability to reduce interest rates in the near future. The onus therefore was on the government's policies to reduce the deficit and to implement reforms. Clearly the Governor was indicating that the performance of the Finance Ministry had not only been poor but the statistics revealed by the Finance Ministry were flawed.
While the economic picture presented by the Governor is without question accurate yet questions are being raised as to the advisability of the interview to a foreign newspaper. This government has seen five SBP Governors including the three-month period when the incumbent was Acting Governor. While all those who resigned would no doubt claim their refusal to endorse Finance Ministry's flawed policies as the reason for their departures, policies that the four finance ministers may blame on the directives of their cabinet colleagues, yet the fact remains that the interview itself was ill-advised. It is not the job of the Governor of a central bank to give interviews to one specific newspaper, a press briefing should be more their style, or to be truthful about the state of the economy as that might lead to a run on the currency which was precisely the outcome of the interview. This truth serum should have been delivered by an independent PBS and Economic Advisor's wing rather than the Governor of the SBP which, in turn, would have ensured that the budget itself became a realistic document with clear achievable expenditure priorities as well as a realistic revenue collection target.