Widen­ing per­cep­tion gaps

The Pak Banker - - FRONT PAGE - Shahid Kar­dar

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 con­tin- ue 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.

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