Facts about economic stability, forex reserves


News & Views

Mohammad Jamil

ON Saturday, the State Bank of Pakistan (SBP) decided to maintain the policy rate at 5.75 per cent for next two months. According to the SBP, “Consumer Price Index (CPI) inflation had been following a rising trend, with sporadic seasonal diversions. The year-on-year CPI inflation had increased from 1.6 per cent in October 2015 to 4.2 per cent in October 2016 and core inflation was inching upwards as well.” State Bank of Pakistan has $18.5 billion whereas commercial banks have more than $ 5 billion, totalling more than $23 billion. However, last month International Monetary Fund stated that “Pakistan’s foreign currency reserves have not yet reached a comfortable level and the rupee is significantly overvalued compared to the US dollar, and requires depreciation to remain competitive in international markets.” This assessment runs counter to the claims by the government.
The problem is that IMF is rich countries’ viceroy, which looks after their interests. There are 189 members of the International Monetary Fund (IMF), but it is run by seven of them – the US, Japan, Germany, the UK, France, Canada and Italy. The bigger a country’s financial quota, the more say it has over the running of the IMF. This means that it is run by the countries that are least affected by its policies. The question, however is, why a resourceful country like Pakistan has to be in the debt trap of the IMF? The answer is that due to the flawed policies of the inept rulers Pakistan has come to the present pass. It spends more than the revenue it collects and imports more than it exports. To meet fiscal deficit it relies upon banks, and to meet current account deficit it approaches the IMF.
After completion of the three-year Extended Facility Program, the IMF Staff Mission Report had stated: “The fund supported program has helped the country restore macroeconomic stability, reduce short-term vulnerabilities and progress on structural reforms. Economic growth has gradually increased and inflation has declined. External reserves have increased, financial sector resilience has been reinforced, and the fiscal deficit has been reduced while social safety nets have been strengthened”. But the situation on ground belies the claims by the IMF and Finance Minister Ishaq Dar. Last month while speaking at a seminar, IMF Managing Director Christine Lagarde said: “Despite marked improvements over the IMF-supported program, Pakistan still only collects little more than half of what is estimated as a feasible amount in taxes.” Addressing media, she said that a Panama or Bahamas leaks like situation could be controlled by improving the system of accountability and transparency.
IMF had overall presented a rosy picture when it said that in the course of the IMF-supported program, Pakistan’s economy has made significant progress toward strengthening macroeconomic and financial stability and resilience, and laying foundations for higher, more sustainable, and inclusive growth.” If agricultural and industrial production and exports have declined; and even services sector’s exports have declined by $2 bn, and other targets have not been achieved, there is room for optimism. The question arises if exports have declined; inflation is on the increase, then what has been achieved by the three-year IMF program. Independent think tanks are of the view that inflation figure has been understated and it is 4.7 percent and not 3.8 percent or earlier 1.83 percent. The cost of pulses, meat, beef, poultry and rents, and ever-rising electricity and gas tariffs do not find place in the CPI.
There is widespread perception that not only inflation figures but also Gross Domestic Product figures are always fudged. Since the government has decided not to enter into the next IMF programme, analysts noticed significant slowdown and reversal in the reform processes like government borrowings, energy reforms, tax reforms, privatisation and re-structuring of loss making public sector enterprises. On August 1, 2016, Finance Minister had claimed that Pakistan didn’t need support from IMF anymore. Despite decline in exports and debt mountain of Rs. 18 trillion which includes foreign debt of $72 billion he was upbeat and presaged that by 2050 Pakistan will become 18th biggest economic nation across world. This appears to be a funniest statement, as Pakistan could not meet any of the targets vis-à-vis fiscal deficit, trade deficit and current account deficit. Remittances from expatriate Pakistanis have also declined.
With the decline in exports, current account deficit is also bound to increase. The government claims that GDP has increased from 2 per cent to more than 4 percent, but it is not reflected neither in the realm of increase in production and job opportunities nor in exports. Pakistan’s problem is growing public debt, which on one hand limits the capacity to build strong defence and on the other limits fiscal space to invest in human development and infrastructure. Unfortunately, Pakistan faces major challenges of income, gender, health and educational inequalities in extreme forms. Over 25 million school-age children are estimated to be out of school; more than 3.7 million of our labour force is unemployed; and about half of total population is victim of food insecurity. In fact, no aspect of life merits urgent attention and greater investment of resources than improvement in quality of education.
The threats faced by Pakistan have to be understood in the light of fast changing regional and international situation, which add urgency to revive the economy so that adequate resources could be allocated to counter them. Pakistan has public debt of more than 65 per cent of the GDP, which is indeed alarming and against the provisions of the Constitution. The fact remains that Pakistan has to follow the instructions of the IMF for increasing the rates of utilities and privatisation of national assets to meet the shortfall in budget and trade deficit respectively. But increase in utilities’ tariff leads to cost-push inflation and our industries are unable to compete in the world market. Direct Foreign Investment is also declining as compared with previous year, which was already meagre. Let us see how the government would manage when it would be obliged to start paying the instalments next year?
—The writer is a senior journalist based in Lahore.