The good, the bad, the ugly

AT around the PML-N government's halfway mark, the party leadership has spared little effort in recounting the 'turnaround' in Pakistan's economic performance under this administration. On the other end of the spectrum, opposition political parties (barring PTI) have been using a combination of more rhetoric and less data to denounce the alleged failings on the economic front of PML-N's third term in office since 1990. The Pakistan Tehreek-i-Insaf is the only one to have analysed the data and the numbers to arrive at their fairly comprehensive, yet somewhat selective, critique.

So what is the reality? Where does Pakistan's economy stand today compared to early 2013 - and how much of it is down to the policies of this government?

There is little doubt from the data that the government has pursued a determined path, under the aegis of an IMF programme, towards achieving macroeconomic stability. The country's official foreign exchange reserves have been built up from $6 billion in June 2013, to $15.6bn as of endJanuary 2016. A combination of releases from the IMF and other IFIs, commercial borrowing, Saudi money and the collapse in international commodity prices has sharply reduced the shortterm vulnerability of the country's balance-of-payments position.

Inflation has declined from 8.3pc year-on-year in July 2013 to 3.3pc for January 2016. Despite difficult circumstances, government tax revenues have recorded, prima facie, fairly impressive increases in the past two years. Revenue performance has been complemented by the appointment of a serious-minded and well-intentioned revenue tsar, the publishing of the tax directory including tax-filing data of parliamentarians, some progress on removing exemptions, and the setting up of a Tax Reforms Commission. In addition, the number of tax filers has increased by around 280,000 according to FBR, while the recent tax amnesty scheme for traders is likely to bring an important segment outside the ambit of taxation into the fold.

The economy's growth performance has improved modestly, with real GDP growing at a provisional 4.2pc in 2014-15. After remaining sluggish for the past two years, the large-scale manufacturing sector is showing signs of moderate output growth across a wider spectrum of sectors. Even private-sector investment appears to be picking up finally, albeit tentatively, while business confidence, as recorded by the latest OICCI Business Confidence Index, has rebounded.

The bad news is that much of the good news on the economy is carried on the shoulders of a single development - the collapse of international oil and other commodity prices. The price of benchmark Brent crude has fallen from $115 in mid-June 2014 to $26 per barrel, before recovering to the current vicinity of $35. This 70pc decline alone has implied a saving of $7.6bn between June 2014 and end-January 2016.

The prices of other imported commodities have also fallen sharply in tandem, amplifying the quantum of saving to the country's external account. On the other hand, export prices have also been hurt. Adjusting for these factors, in net terms, the government has received a windfall of at least $7bn during this period on the external front. In other words, without this bonanza in commodity prices, Pakistan's official foreign exchange reserves would have been $7bn lower, at $8.4bn - deflating a much-touted achievement of the government.

The other effect of the favourable movement in international commodity prices has been on inflation. Had oil prices remained above $100 per barrel over the past 18 months, econometric modelling suggests that the year-onyear CPI inflation would be six percentage points higher. That means CPI inflation for January would have been in the nine to 10pc range rather than the 3.3pc that was recorded. The implication is that there is little government effort or policy input in the decline recorded in inflation - other than passing on a portion of the fall in international oil prices.

In fact, three government interventions have actually helped keep inflation - especially food inflation - higher than what would have been the case. In the case of petroleum, the government has passed on to domestic consumers only 34pc of the 70pc fall in international oil prices. It has overtaxed highspeed diesel, the backbone of the country's transportation and agriculture, to make up for lost revenue. If the full decline in international prices had been passed on, the diesel price would have been Rs43 per litre lower today.

In the case of wheat, it increased the support price in November 2014 at a time when wheat prices in Pakistan were already substantially higher than world prices. And in the case of sugar, government policies have increased local sugar prices over 10pc in the past year, compared to a 13pc decline in international prices. Similarly, FBR's revenue performance is almost entirely predicated on the increase in sales tax on petroleum, the levy of additional customs and regulatory duties on imports, rate enhancement in existing taxes, introduction of new taxes on existing taxpayers - and the withholding of tax refunds. Another major area of under-performance is power-sector reform, as well as wider reform and restructuring of the public-sector enterprises, barring to an extent Railways. The government receives failing marks in the key area of institutional reform (making appointments on merit rather than cronyism or connections to the Sharif family, avoiding conflicts of interest for its public office holders, making transparent and accountable decisions in mega projects such as the China-Pakistan Economic Corridor or LNG import).