THE government (with the State Bank of Pakistan in tow) is, understandably, ecstatic that the IMF, other donors and international rating agencies like Moody’s and Standard and Poor’s are endorsing Islamabad’s assertion that it has achieved notable success in turning the economic tide and in attaining a semblance of macroeconomic stability through reduced budget deficits and a gentler inflation rate.
However, unfortunately for the government, these pronouncements are not being taken at face value by even potential domestic investors. Many, seemingly, do not agree with this assessment, if not actively question the intentions underlying such an evaluation. Instead of the generous appraisal by third parties inducing a sense of relief that all is on the mend and that the economy is poised to shift onto a higher and sustainable growth path, the more vocal sections of the population feel discontented. Why is this so? Is it only owing to a jaundiced public perception, while the reality is different and the outlook optimistic?
The ordinary public cannot seriously be expected to go into a trance on being informed that the budget deficit has been controlled, that interest rates are at the lowest in the last 40 years (although they cannot seem to get banks to lend to them) and that foreign exchange reserves are now close to four months of import — the best level they have reached in recent memory (even if built entirely on borrowed money). They see their lives blighted by load-shedding, the cost of energy, the imposition of silly taxes or the revision of tax rates to ridiculous levels, as well as serious lack of employment opportunities (especially for the youth).
People are even contesting the data on the basis of which Islamabad is claiming a notable deceleration in the rate of inflation. The unease, if not anger, is greater in the rural areas, suffering not only from the precipitous fall in international prices of commodities but also because of rising costs of inputs as a result of government policies. The most recent example of this is the cut in import duty on powdered milk to help milk producers and keep prices soft for urban consumers (the government’s constituency), at the expense of earning a significant proportion of their incomes from selling milk (the produce of their livestock) to milk packagers.
People are contesting the data on the basis of which deceleration in the rate of inflation is being claimed.
Local independent commentators on the economy have also been challenging the veracity of these declarations. In their view, the slowing down of inflation has resulted more from the decline in commodity prices in global markets (especially that of oil which, after the Iran deal, are dropping further) than on account of measures and actions taken by the government. Moreover, additional borrowings have enabled the maintenance of the rupee at a level higher than its intrinsic value (with its adverse effect on exports), which has contributed to the change in ‘inflationary expectations’ of economic actors. However, this situation is more of a transitory and temporary nature.
As regards the supposed improvement in the growth rate of the economy and the narrowing of the budget deficit, their contention is that this has been achieved allegedly through gross data manipulation. In addition, ‘creative accounting’ techniques have been harnessed into showing a smaller budget deficit; and despite all these tricks the tax to GDP ratio is at the 2008 level when the previous Fund programme was launched.
The IMF (essentially for global political reasons and its own need to speedily recover its past loans) has been a silent, if not active, partner in accepting the massaging, if not blatant manipulation, of numbers to show a lower budget deficit. What is particularly startling is the IMF turning a blind eye to the continued parking of the circular debt and losses of state-owned enterprises outside the books, the Federal Board of Revenue holding back GST refunds owed to exporters, the treatment of some non-tax revenues as tax revenues simply to show an improvement in the tax to GDP ratio, the slashing of the PSDP to meet “deficit targets”, the SBP’s injections of close to a trillion rupees in the market to defend the policy rate that it has announced (thereby keeping Islamabad’s cost of borrowing lower than it would have been otherwise) and the reflection of privatisation proceeds under SBP’s profits, etc. All this has resulted in funds being absorbed in servicing the massive debt and in the maintenance of state operations, contributing to reduced production activity, while scarce investment resources get spent on low priority ventures like roads as opposed to railways (in which the Chinese actually excel).
Having recovered past loans, will the IMF ponder over whether it should continue to lend its name to Pakistan’s quest for more donor and international banker generosity? With the US Congress not particularly supportive of State Department requests for financing, the US government finds itself better equipped to persuade the IMF and the World Bank to continue to bankroll us for having brought the Taliban to the negotiating table.
From the above, therefore, it should be obvious that the IMF is not in the mood to immediately pull the plug on our life support system and is likely to continue to provide programmed funding, despite our failure to fully meet performance criteria and agreed benchmarks. But then, for how long can this black comedy of numbers continue? How will the debts being accumulated be serviced after 2106 as they become due, without cause for worry? The problem is becoming acute, expected to become difficult to deal with even through a reshuffling of maturities.
The inability and unwillingness of successive governments to take the actions required to deal with chronic issues and risks continuously building up has resulted in the economy settling at a substantially weaker rate of growth than needed to avoid social unrest by providing productive and gainful employment to the 1.5 million annual entrants to the labour force. The postponement of fundamental structural reforms and repeated bailouts by the rest of the world has been possible because of our ‘nuisance value’. How long can we keep deferring the day of reckoning is anyone’s guess, unless we are content with muddling through year after year as the rest of even South Asia hurtles past, growing at almost twice our real growth rate, not the inflated rate being advertised by Islamabad.
The writer is a former governor of the State Bank of Pakistan.
Widening Perception Gaps | Shahid Kardar
Published in Dawn, August 4th, 2015