EDITORIAL: The release of the third State Bank of Pakistan (SBP) quarterly report, as expected, remains bound to the continued support for the design of the International Monetary Fund's (IMF's) Extended Fund Facility programme on which a staff-level agreement was reached on 12 May 2019 with extremely harsh upfront prior conditions. The data shows poor performance as most of the targets were missed but the blame is squarely placed on the Covid-19 pandemic although the country went into lockdown for the last 10 days of the third quarter ending on March 31 2020. Therefore, it is only in the last quarter that the impact of the pandemic on the economy surfaced. Additionally, the SBP report notes 11 percent discount rate though the rate was decreased from the prevalent 13.25 percent by only 75 basis points on 18 March and only after considerable criticism was hurled at this decision, did the Monetary Policy Committee reduce it by a further 150 basis points a week later on 24 March. In other words, for the much longer period under review (July-March), the rate was 13.25 percent and that rate accounted for a massive contraction of private sector credit, from 10.2 in 2019 to 4.8 percent in 2020, and a massive rise in the government's indebtedness in times to come as with the objective of converting short-term into long-term debt Pakistan Investment Bonds were issued at 13.25 percent rate.
The components of the negative 0.4 percent growth rate for the year past constitute as per the SBP: (i) a rise in farm output of 2.7 percent against 0.6 percent in 2019 and 4 percent during the PML-N tenure. Disturbingly, this growth rate was projected in the Economic Survey 2019-20 which acknowledges that "the quantum of detailed damage assessment (of the locust attack) may take some time and efforts are underway to agree on an assessment (including humanitarian aspect also) in collaboration with stakeholders;" (ii) services declined from 6.3 percent in 2018 to 3.8 percent in 2019 and to negative 0.6 percent in 2020 however here too the source is the Economic Survey which notes data is limited to July-March 2020 and not July-June prompting one to assume that the impact on this sector post-March would have been significantly more due to Covid-19; and (iii) large- scale manufacturing growth declined to negative 7.8 percent last year against negative 2.6 percent during the Asad Umer tenure; however, here too the figures do not reflect the entire year as the Economic Survey notes this as data limited to July-March 2020.
The SBP report inexplicably claims that there was an improvement in the inflation outlook though the comparison is not with previous years when the country was not on the IMF-designed programme - CPI was 4.6 percent July-March 2018, 6.3 percent in the comparable period of 2019 and almost double in 2020 at 11.5 percent - but with the inflation projection by the IMF of between 11 to 13 percent for the first year of the programme due to its design.
Aggregate demand was curtailed due to the contractionary monetary and fiscal policies (the latter evident from the rise in tax revenue to 12.6 percent till March this year against 2.9 percent the year before and 16.2 percent during the PML-N tenure) though the lockdown subsequent to the onslaught of Covid-19 led to a further contraction that should have curtailed inflation but clearly did not. The PTI administration's economic managers conveniently place the entire blame on supply side issues, read mafias/cartels, in line with the Prime Minister's often stated concerns while ignoring their own policies that have contributed to inflation notably a high policy rate, with a rupee slide and high taxes. And last but not least, heavy reliance on taxes levied on petroleum and products has raised transport costs as well as the cost of living of an average household.
There have been significant gains in reducing the current account deficit but these have been at the cost of GDP growth rate, rising unemployment and lower productivity. One would have certainly hoped for a programme design that would have reduced the costs through a more phased approach. In other words, the cost has been simply too high. SBP's reserves were given at 10.8 billion dollars against 10.5 billion dollars the year before and 11.6 billion dollars in 2018 though these reserves reflect the requirement of contracting 38.6 billion dollars external loans during the EFF programme period which was scheduled to end by September 2022 but with Covid-19 is likely to end by the first or second quarter of 2023.
It is disturbing for the report to state that "the outlook for the external sector is reasonably comforting, with the current account expected to remain bounded" as this implies that the SBP remains oblivious of an insignificant linkage between a depreciating rupee and a rise in exports (evident since Miftah Ismail began to depreciate the rupee as per the IMF recommendation with exports not rising by more than a couple of hundred million rupees) while the SBP may be tempted to raise rates once Covid-19 has been dealt with to attract "hot" money.
There are some flaws in the EFF design, however, what cannot be challenged are the governance reforms that have been proposed for the appallingly poor performance particularly in the tax and power sectors, as well as in state-owned entities, and sadly these remain unimplemented with the incumbent government relying like its predecessors on either raising rates/tariffs compelling the hapless consumers to pay for the continuing poor performance of these sectors and/or making large budgetary allocations that it can ill afford.
Copyright Business Recorder, 2020
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