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The eighth review | Syed Bakhtiyar Kazmi

The eighth review | Syed Bakhtiyar Kazmi

Since the 99 percent are clueless about how the economy works, there is a tendency to kneel before those perceived to have the necessary expertise

“In the period ahead, consolidating these gains and focusing the reform efforts on overcoming structural challenges still facing Pakistan will be important to achieve higher exports, investment, jobs and growth” – International Monetary Fund (IMF) mission chief, commenting after the eighth quarterly review of Pakistan’s performance under the Extended Fund Facility.

A small clarification: this quote and related comments hereinafter have been reproduced or referred to from a competing publication and in case of any omission or commission, they are the ones who should be taken to task.

To put it rather tepidly, does the common man in Pakistan have any idea about what is being said above? This was the eighth quarterly review, meaning two years have elapsed since the IMF started managing Pakistan’s economy. At some point in time, an independent analysis is required to prove that assiduously ticking off poignant terms and pursuing reforms, thrust upon developing nations, actually translate into gains.

On the other hand, perhaps there is no need for the analysis; the review itself, unfortunately, identifies that Pakistan is still facing “structural challenges”. This hackneyed expression is becoming exasperatingly pestiferous. Which structural challenges, other than the Islamabad Metro Bus, have been successfully addressed over the last two years in the first place? The almost nondescript narrowing of the budget deficit and rebuilding of foreign exchange buffers might be the most likely condescending retort. Albeit, how on earth can supplementing bank accounts with borrowed dollars, in simplistic terms, vouchsafe a favourable review, is what requires elaboration by the erstwhile literati.

More importantly, have the interminable reform efforts of the last two years actually translated into higher exports, investments, jobs and growth? This analysis is necessary for an informed decision over continuing with the prescribed reforms, the alternative being to blindly continue to drive over the fiscal cliff. Frankly, ignoring the inherent fallibility of economic data derived from broad assumptions, the diagnosis to date is: absolutely not. Exports seemingly have stagnated and one can only wonder about the gains that were supposed to accrue pursuant to the government’s accomplishment of winning the GSP Plus status, which no one talks about anymore. GDP and investment are still languishing and, frankly, the precise determination of unemployment in the country will remain a mystery for the foreseeable future, similar to the literacy rate.

Robust growth in workers’ remittances and the fall in oil prices internationally are undisputed factors for the current account having avoided a pratfall; they are also the catalysts for inflation taking a dip. If all the good that has happened is because of fate and not reforms, what exactly is the incentive for the nation to continue on the dictated path? Would it not be better to pray for oil prices to continue to fall and workers’ remittances to double?

Dear readers, this obsession with writing on the economy is motivated by dual considerations. First, there is already more than sufficient prognosis available on the fallouts of the Judicial Commission (JC) report and the related kicking out of the losing party’s MNAs, the melodrama in Karachi followed by more resignations and the rest of the daily intrigue necessary for electronic media rating all of which are a complete waste of time designed to cloud substantive issues. Second, since the 99 percent are clueless about how the economy works, there is a tendency to kneel before those perceived to have the necessary expertise. This column is an attempt to rectify some of the pitfalls of ignorant bliss.

Getting back to the eighth review, unfortunately the worst is yet to come; the IMF had to extend two waivers, as the related performance targets were missed, so that Pakistan could borrow more debt from it. Most confusing is to penalise the government’s inefficacy in curtailing borrowing from the Central Bank, considering that the alternate strategy of the Central Bank lending to commercial banks with the latter lending to the government at a much higher cost is deemed appropriate and not requiring a waiver. And why borrowing from the Central Bank in rupees is worse than borrowing from the IMF in foreign currency is another conundrum, especially with the much-publicised record foreign exchange reserves available with the Central Bank.

The government apparently has offered to substitute the “pound of flesh” – the lost revenues — within the next two weeks in the form of additional measures and allowances in taxes and in electricity and gas tariffs. This offer and its acceptance by the masters of economic theory are unfathomable. If the objective is indeed investment and growth, increasing taxes and tariffs, by extracting money out of the common man’s pocket, will adversely impact consumption and investment, and since the government has also been ordered to reduce the fiscal deficit, exactly who will be investing and where will the economic growth materialise from remains to be seen.

The above steps, while detrimental for exports, will also provoke inflation, more like stagflation; the government already admits that inflation is expected to rise in the future. Side by side, ominously, the rupee continues to fall. According to the State Bank’s estimates, the exchange rate should be around 119. Although, rather amusingly, on the Big Mac Index, the rupee is undervalued by around 23 percent; assuming the Big Mac sells for Rs 380 in Pakistan, the current exchange rate of Rs 103 to a dollar and that the Big Mac is selling for $ 4.79 in the US. A quick explanation on how the index works: the local cost of a Big Mac is converted to dollars at the prevailing exchange rate and compared with its price in the US. If the converted price is below the price of a Big Mac in the US, the domestic currency is cheap and vice versa.

The textile industry is already screaming about the cost of electricity and rising taxes, with traders mounting vehement opposition against imposition of further taxes on banking transactions and otherwise. While the former’s success in increasing exports and employment over the last many years is extremely debatable, things will surely not improve if the leading exporters are taxed further to pay for the circular debt, for which the government has no out-of-the-box solution.

Limited space and fear of haranguing from the editor, is the impetus behind one again abruptly winding up the discussion. However, beefing up foreign exchange reserves to act as a buffer is necessary but the buffer’s quantum can be reduced by severely taxing unnecessary imports. Investing in manufacture, by public or private sector, and curtailment of trade deficit are the only reforms Pakistan needs.

The writer is a chartered accountant based in Islamabad. He can be reached at syed.bakhtiyarkazmi@gmail.com and on twitter @leaccountant

Source: http://www.dailytimes.com.pk/opinion/16-Aug-2015/the-eighth-review

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