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