EDITORIAL: Prime Minister Imran Khan used twitter to declare “great news for Pakistan” claiming that “we are headed in the right direction. The current account was in surplus of 73 million dollars during September 2020, bringing surplus for the first quarter to 792 million dollars compared to a deficit of 1492 million dollars during the same time last year. Exports grew 29 percent and remittances grew by 9 percent over the previous month (August).” These views have repeatedly been shared with the general public by the Prime Minister as well as his economic team leaders – Dr Hafeez Sheikh, Advisor to the Prime Minister on Finance and Dr Reza Baqir, Governor State Bank of Pakistan – as a major accomplishment a few months after the country went on an International Monetary Fund (IMF) programme.
The right direction, this newspaper has consistently pointed out, implies a reduction in the current account deficit, foreign exchange reserves not backed by increased borrowing but by higher earnings from exports/remittances, and last but certainly not least a Gross Domestic Product (GDP) growth rate to ensure sustained rise in domestic productivity and job opportunities with the potential to render politically challenging structural reforms (particularly those required to deal with the poorly performing energy and tax sectors) palatable to the general public.
The government’s narrative of accomplishments in the economic arena has been under considerable criticism because of four devastating outcomes of adhering to the IMF programme through the implementation of severely contractionary policies. Firstly, a high discount rate of 13.25 percent (July 2019 to March 2020) raised the cost of borrowing to levels that made input costs too high for the productive sectors accounting for large-scale retrenchments in the private sector leading to sustained negative large-scale manufacturing (LSM) growth. The current inordinate reliance on builders/construction sector to jumpstart the economy through grant of incentives may bear some fruit but with growth projected to a low of 2 percent by the government and one percent by multilaterals the economy is not expected to emerge from crisis anytime soon. To this day the government has not been able to show positive LSM sector growth. Today’s discount rate of 7 percent is higher than the core inflation of around 5.5 percent, prompting calls for it to be lowered as in other pandemic ridden countries, while the Consumer Price Index is over 9 percent, to which Dr Baqir inexplicably linked the discount rate last year. There is therefore an added uncertainty in the market as to which way the rate would move in future.
Secondly, the real effective exchange was only 93 in June this year (prompting previous SBP governors to maintain that it is at present undervalued) against the 121 in June 2017 (Ishaq Dar is rightly accused of deliberately keeping the rupee overvalued that had disastrous implications on the country’s exports and imports leading to a historic high current account deficit); however each rupee loss of value to the dollar adds on 100 billion rupees to the country’s debt. The rupee lost value, it was argued, because the SBP adopted a market-determined exchange rate soon after a staff-level agreement with the Fund on 12 May 2019. Disturbingly, the recent strengthening of rupee is attributed to market intervention with the foreign exchange reserves of around 12 billion dollars not fully backed by the country’s desired earnings (exports and remittances) but at least half by borrowing reminiscent of the period when Dar held the finance portfolio. Exports are not rising due to government policies but because export orders have been reactivated after the four to five month lockdown earlier this year. And while one would hope that this trend is sustained yet the fact is that our major buyers in Europe have begun lockdowns due to the second wave of the pandemic. Remittances too have risen but their sustainability is in question because the non-official channels of remitting money have closed down due to the pandemic.
Thirdly, the fiscal deficit has been rising mainly because the economic team leaders agreed to an unrealistic tax target. The IMF’s rationale in setting the high fiscal target was based on a flawed assumption that those who do not pay taxes can be quickly brought into the tax net, though Dr Hafeez Sheikh as the finance minister in 2010 (till 2013) should have known that this is easier said than done and that it is a slow process that could well take years. It is relevant to recall that a IMF programme was suspended in 2010 because of the government’s failure to undertake the necessary and agreed tax and energy sector reforms.
Energy sector reforms remain pending to this day and the circular debt has risen to more than 2.3 trillion rupees against the government’s inherited 1.2 trillion rupees. The government is focusing public attention on the Memoranda of Understanding it has signed with the Independent Power Producers (IPPs) that envisage lower rates in future, a positive development; however sector inefficiencies continue and are being squarely passed onto the consumers – directly on households as well as on the productive sectors which are passing on the higher input cost to consumers. It is therefore little wonder that inflation is on the rise.
And finally, debt is rising by more than in previous administrations. Domestic debt in just two years rose form 16 trillion rupees to 23 trillion rupees while foreign debt is projected by the economic team leaders to rise by a whopping 40 billion dollars in just thirtynine months of the IMF programme.
The fallout of the Fund programme (with contractionary monetary and fiscal policies) was a projected inflation rate of 13 percent last year, a rate that was double what was prevalent at the time Dr Hafeez Sheikh took over from Asad Umer. To blame it entirely on supply side factors that accounts for the Prime Minister’s overwhelming focus on hoarders/profiteers and cartels, is therefore not entirely correct.
Copyright Business Recorder, 2020