Muddling through in 2015(DAWN)

OFFICIAL refrain touts four developments as government achievements — lower inflation rate, reduction in interest rates, a more controlled budget deficit and growing foreign exchange reserves. However, none of these were outcomes of better economic management. Inflation is lower on account of the high base effect and for fortuitous reasons: a drop in global commodity prices because of a slowing down of the Chinese economy and other policy measures whereby China is no longer a major international buyer in the commodities market. This factor should keep inflation subdued although it would go up marginally with the forthcoming adjustments in the prices of utilities, especially gas.

The reference to lower interest rates fails to acknowledge that the State Bank of Pakistan’s policy rate is an artificial construct. Commercial bank deposits have actually declined at a time when Islamabad has increased its borrowings from the commercial banks. The SBP has obliged both parties by a) pumping close to Rs600 billion into the system (with banks borrowing this money at 9.3pc to invest in government PIBs earning more than 10pc per annum — bankers are understandably laughing and thanking SBP); and b) lowering the interest rate on the plea that inflation has declined. But by injecting such large sums SBP is simply defending the reduced interest rate, which (with depositors exiting the banking system for better returns elsewhere) would have been higher but for SBP’s intervention.

Several commentators have argued that the government, in its anxiety to show a lower budget deficit, has resorted to window dressing and sleight of hand. The IMF (for global political reasons and its own need to speedily recover its past loans) has been an active partner in this blatant massaging of numbers. Of course fiscal correction is important, but the quality of correction is more important. For example, the reduction in the fiscal deficit (even if we accept the government’s numbers) is being achieved by drastically reducing development expenditures, which are likely to be cut further to finance the expenditure on the war against terrorism. Fiscal discipline cannot surely be at any cost to growth — austerity cannot be an end in itself. Neither theory nor empirical evidence proves conclusively that macroeconomic stability necessarily leads to economic growth.

Similarly, what is there to gloat about reserves built entirely on borrowed money ($2bn at extortionate interest rates) and one-off flows from benefactors while our external accounts deteriorate? Today, the rupee is overvalued, partly reflected in rising imports and declining export earnings. And despite the 50pc fall in oil prices our current account deficit will exceed $4bn indicating how we are likely to squander this gift. Foreign portfolio investment in our stock market (with a market capitalisation close to $4bn) is our potential Achilles’ heel. A hasty exit by portfolio investors and panic-stricken foreign companies transferring their revenue reserves to head office coffers could seriously impact the rupee’s exchange rate.


Perish the thought that there will be any improvement in governance, and meaningful reforms.


There is also the repeated reference to eager Chinese investors as another positive development. However, a detailed investigation into the ‘incentives’ on offer would be instructive to decipher why the Chinese are choosing Pakistan when domestic entrepreneurs are seemingly shy of investing in the local economy in an apparently unstable environment.

We face huge challenges in pushing the economy onto a higher growth path on a sustainable basis owing to structural factors that we have allowed to fester over the last 70-odd years. Will these be addressed without resorting to silly ideas to raise revenues or cut spending that would hurt the informal economy still functioning reasonably well? Can one pragmatically expect fundamental reforms given the social backgrounds of our leadership and their mindsets — many of them either non-taxpayers or paying piddling amounts in proportion to the earnings that finance their fancy lifestyles? Powerful interest groups have resisted reforms that would entail dilution of their elite/class privileges and patronage powers. The quality of economic management by all governments thus far should also disabuse us from harbouring any such notions.

There is no constituency for serious reform that will have to be administered to correct these wrenching imbalances. How will basic reforms be launched and implemented by an uninspiring, self-serving and inept leadership? Can it a) phase out subsidies on wheat, fertiliser and (now) sugar; b) levy and collect taxes from tax evaders and those still legally outside the tax net — instead of burdening existing taxpayers; c) divert funding away from unproductive spending; d) privatise Pakistan Steel Mills, PIA, Railways and the electricity distribution companies, etc, that are haemorrhaging public finances by being overstaffed, pampered, poorly managed/mismanaged; e) resolve the perennial issues connected with circular debt despite the decrease in oil prices; f) downsize the bloated federal state structure that continues to accumulate (despite the 18th Amendment) on account of the overlap of functions between Islamabad and lower government formations, which will also reduce opportunities for corruption and extracting rents; g) strengthen institutions and confer on them real autonomy; and h) change the orientation of government as an employment agency for family and cronies.

The political leadership does not have the vision, the spine and the ability to resolve our manifold crises, let alone tackle the avalanche of expectations. Our style of governance is to perpetually look towards the international community for handouts to pay our bills, as if we have an open-ended licence to mismanage our affairs.

So, perish the thought that there will be any improvement in governance and meaningful reforms, unless our external patrons decide to walk away, compelling us to fend for ourselves. Maybe we will then learn to swim. The default option is ‘drowning’ that we seem to be unwittingly (or is it wittingly?) pursuing. It appears, therefore, that as the rest of even South Asia bypasses us, we will, at best, muddle through 2015, bumping along at the bottom until we finally hit road blocks that we will not be able to surmount without the economic, political and social strength to remove or overcome them.

The writer is a former governor of the State Bank of Pakistan.

Published in Dawn, January 6th, 2015

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