Mis­placed op­ti­mism

The Pak Banker - - Front Page - Dr Ash­faque H Khan

IN de­vel­op­ing democ­ra­cies such as Pak­istan, there is a ten­dency for the in­cum­bent gov­ern­ment to cam­ou­flage its so­cio-eco­nomic fail­ures with a sense of ar­ti­fi­cial op­ti­mism aimed at de­lud­ing the masses dur­ing the run-up to the next elec­tion. Re­ly­ing upon po­lit­i­cal gim­mickry, such a gov­ern­ment re­sorts to blam­ing the pre­vi­ous regime for its fail­ures, choos­ing one or two eco­nomic in­di­ca­tors to pub­li­cise its suc­cess and promis­ing the moon to the hap­less vot­ers once it has been re­stored to power again.

The cur­rent eco­nomic team and its po­lit­i­cal lead­er­ship are en­gaged in such ac­tiv­i­ties. The fol­low­ing el­e­ments serve as the foun­da­tions of the self-cre­ated op­ti­mism: (i) that this gov­ern­ment has in­her­ited a shat­tered econ­omy; (ii) the pre­vi­ous regime had cre­ated a bub­ble econ­omy; (iii) tax col­lec­tion has more than dou­bled dur­ing the cur­rent regime; (iv) in­fla­tion has been brought down to 8.0 per­cent from as high as 25 per­cent ow­ing to pru­dent fis­cal and mone­tary poli­cies; (v) the gov­ern­ment gave a new NFC Award; and (vi) the BISP is a suc­cess­ful pro­gramme of so­cial-safety nets.

Let me dwell upon each el­e­ment to dis­pel the myth of this mis­placed op­ti­mism. As re­gards in­her­it­ing a shat­tered econ­omy, the less said the bet­ter for the regime. The eco­nomic team, the po­lit­i­cal lead­er­ship and sym­pa­this­ers should tell the truth to the peo­ple of Pak­istan by shar­ing the con­tents of the let­ter of in­tent sub­mit­ted to the IMF, dated Novem­ber 20, 2008, while ne­go­ti­at­ing a 23-month standby ar­range­ment.

The gov­ern­ment was full of praises for the eco­nomic man­age­ment of the pre­vi­ous regime dur­ing 2000 to 2008. They ac­knowl­edged dou­bling of the GDP and per-capita in­come in dol­lar terms, tripling of in­ter­na­tional trade, real GDP grow­ing at an av­er­age rate of over seven per­cent dur­ing most of that pe­riod, im­proved macroe­co­nomic per­for­mance en­abling Pak­istan to re-en­ter the in­ter­na­tional cap­i­tal mar­kets in the mid-2000s, buoy­ant out­put growth, low in­fla­tion, and the gov­ern­ment’s so­cial poli­cies con­trib­uted to re­duc­tion in poverty and an im­prove­ment in many so­cial in­di­ca­tors. While the gov­ern­ment could not hide facts from the IMF, it did so de­lib­er­ately from its own peo­ple by pre­sent­ing them with a to­tally dis­torted pic­ture of the econ­omy.

As re­gards the bub­ble econ­omy, the above con­fes­sion by the gov­ern­ment sim­ply negates this as­ser­tion. How can a bub­ble last for so many years (2000-2008)? The fact is that the econ­omy never re­ceived pri­or­ity from the gov­ern­ment. In­stead of terming the econ­omy as a bub­ble, the gov­ern­ment must ac­knowl­edge its own fail­ure. In fact, blam­ing the pre­vi­ous regime for the cur­rent eco­nomic ills even af­ter nearly five years in power is noth­ing but ac­knowl­edge­ment of fail­ure.

On dou­bling tax col­lec­tion, the eco- nomic team should have known that nom­i­nal GDP (the base of tax­a­tion) has also more than dou­bled dur­ing the same pe­riod ow­ing to the per­sis­tence of higher dou­bledigit in­fla­tion. While the FBR tax col­lec­tion in­creased by 87 per­cent, nom­i­nal GDP grew by 102 per­cent dur­ing 2008-12, thus re­veal­ing that the tax-to-GDP ra­tio for FBR has de­clined by def­i­ni­tion.

On bring­ing in­fla­tion down from 25 per­cent to eight per­cent the eco­nomic team should know that they are com­par­ing an ap­ple with an orange. The in­fla­tion rate of 25 per­cent is mea­sured with 2000-01 as base year, with food items ac­count­ing for over 40-per­cent weight. The in­fla­tion rate of eight per­cent is mea­sured with 2007-08 as base year, with food items ac­count­ing for 34-per­cent weight.

The in­fla­tion num­ber since July 2012 is be­ing ma­nip­u­lated. OGRA has re­duced the gas price slab from four to three whose “re­alised” im­pact is a de­cline in gas price by over 42 per­cent. With its weight of al­most 1.6 per­cent in CPI, it has pulled in­fla­tion down. Dur­ing the last four months (July-Oc­to­ber), in­fla­tion is down by al­most four per­cent­age point. Can any sen­si­ble econ­o­mist be­lieve that in the pres­ence of ex­tra­or­di­nary mone­tary eas­ing (money sup­ply grow­ing by 17.5 per­cent, do­mes­tic credit in­creas­ing by 22.5 per­cent, and dis­count rate down by 200 bps) and height of fis­cal in­dis­ci­pline, the rate of in­fla­tion has come down so rapidly? On the new NFC Award, the fi­nance min­is­ter fi­nally spoke the truth in an Oc­to­ber 31 cab­i­net meet­ing when he came un­der fire. He not only crit­i­cised the NFC Award but the BISP as well.

The eco­nomic team and the po­lit­i­cal lead­er­ship would like to hide the fol­low­ing facts from the gen­eral pub­lic: (i) that eco­nomic growth has slowed to an av­er­age of three per­cent per an­num; (ii) in­dus­trial

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