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What is (not) in numbers?

Economic pundits and bankers alike are lately skeptical of the credibility and authenticity of macroeconomic indicators. These experts have been left wondering over the contradictions of sharp depreciation of the local currency and decelerating inflation.

After all, the countrys foreign exchange reserves have fallen; albeit not sharply enough to justify a 15 percent downward revision in the value of Pakistani Rupee compared to the US Dollar, in less than 24 months.

Movements in a few macroeconomic variables are counter-intuitive and some are in contradiction to modern-day economic theories. Both monetary aggregate growth and mobilisation of deposits stood over 15 percent in the last 12 months while inflation was well in single digits. Does this imply a real GDP growth of mere 3-4 percent?

Taking monetary aggregate growth as a proxy for nominal GDP growth; simple arithmetic would imply a real growth rate of 7-8 percent; but that is not the case. Inflation and rupee depreciation have a cause-and-effect relationship. But despite steep devaluation of currency the former is tapering.

These ironies are mind-boggling and hard to explain in economic terms. Some talk about the fudging of official statistics; some say the grey economy is doing the trick. Still others consider these anomalies as deliberate efforts to promote exports and curtail imports; perhaps a lesson learnt from Chinas economic managers who have long kept their currency undervalued for trade gains.

There is something wrong somewhere and the devil lies in the details.

There has been a clear shift in the trajectory of inflation after rebasing of the Consumer Price Index (CPI). There is nothing inherently wrong with rebasing of CPI. However, the choice of the base year is suspect. Given that inflation shot through the roof in FY09; using this year as the foundation for the Index, makes subsequent price increases seem trivial.

Then there was a sharp decrease of 49 percent in gas prices in July 2012. Had this unexplainable decrease not taken place; the CPI tally at the end of 1HFY13 would have stood at 9.6 percent; not 8.3 percent.

Similarly, lower gas prices brought a six percent drop the CPI, transport sub-index in November, compared to the previous month. Since this decline is the most significant factor behind stymied inflation; its role in creating room for a lax monetary policy cannot be over emphasized.

The other anomaly of unbridled fall in the local currency against foreign currencies warrants attention. Is it a deliberate effort to make our exports competitive and imports expensive? Although there has been no exclusive admission of this strategy from the government, any such plans will likely fall flat. This is so because while the countrys imports are largely inelastic, export growth is hurdled by the countrys energy crisis.

To add to the ado, this fall in Rupees worth is going to have its impact on the second round of inflation. Nonetheless, what is happening in currency market is in accordance with the prescriptions of the International Monetary Fund and this trend may continue. Better keep your savings in dollars!


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Foreign Debt $60.9bn
Per Cap Income $1,368
GDP Growth 3.6%
Average CPI 7.5%
Trade Balance $-1.558 bln
Exports $2.117 bln
Imports $3.675 bln
WeeklyJuly 10, 2014
Reserves $14.638 bln