EDITORIAL: Prime Minister Imran Khan claimed in a tweet that the economy is on the right track citing "continuing recovery in exports which rose 20 percent compared to June 2020 and record remittances" and a surplus current account of 424 million dollars in July 2020 against a deficit of 100 million dollars in June 2020. These are without doubt positive indications; however, given the linkages between key macroeconomic indicators it is relevant to evaluate the policies/factors behind any improvement with the overarching objective of strengthening those policies/factors through appropriate policy measures and thereby ensure sustained improvement.
The Prime Minister's tweet may have been in response to the PML-N press conference on the government's two-year performance marked by three days of press conferences by various members of the cabinet claiming achievements that were being challenged by analysts. The PML-N focused more on comparing its own achievements in the economic arena with those of the incumbent government. The result: the Prime Minister's tweet focused on those areas where he reckoned there was an improvement and ignored areas of considerable concern; while the PML-N focused on a comparison of data rather than on acknowledging Dar-era flawed policies notably an over-valued rupee that encouraged imports over exports, and heavy reliance on foreign borrowing (from multilaterals/bilaterals/commercial banks as well as through debt equity) by arguing that the rate of return was lower abroad than at home.
Exports rose in July 2020 to 2329 million dollars from 1975 million dollars in the previous month while in March 2018 (the last month of the PML-N tenure) exports were 2316 million dollars. One cannot compare July 2020 with previous years because of the onslaught of the pandemic; however, the government would be well advised not to take the July figure as the start of a trend as confirmed export orders delayed/postponed by foreign buyers due to the pandemic began to be shipped abroad. In other words, the spike may not be sustained.
Imports, a major casualty of a depreciating rupee and a high discount rate in 2019-20, which in turn impacted negatively on manufacturing growth reliant on imported raw material and semi-finished products with a consequent impact on unemployment, was estimated at 4427 million dollars in July 2020 against 4176 million dollars the month before while imports in July 2019 were 5065 million dollars.
The trade imbalance in July was 2098 million dollars against 2201 million dollars in June 2020 as opposed to 3197 million dollars in March 2018. Thus the improvement in the current account is mainly not attributable to an improvement in the trade balance but on the rise in remittances which again may not reflect a 'trend' because (i) due to the pandemic increased remittances began to flow through the legal banking system which maybe partly responsible for the spike, and (ii) pandemic coupled with a recession in countries where the bulk of our remittances are sourced from led to severance packages which may have spiked remittance inflows.
But what must be a source of serious concern for the incumbent government is its heavy reliance on domestic and foreign borrowing - heavier than is justified by repeated claims that it is borrowing to pay off past loans. The PML-N government raised domestic debt by nearly 6893 billion rupees during its five year tenure (though in all fairness it is also responsible for dishonestly borrowing over 480 billion rupees to retire the circular debt on the second last day of the 2012-13 to lay the onus on the outgoing PPP government); however, the PTI administration borrowed 6061 billion rupees till March 2020 (in less than two years) with the heaviest reliance on Pakistan Investment Bonds (PIBs) last year - to the tune of 12.254 trillion rupees till March 2020 (against 3.4 trillion rupees in 2018) to attract hot money with a record high discount rate of 13.25 percent.
Foreign borrowing has been projected by PTI's economic team leaders at a record 38.6 billion dollars with the International Monetary Fund (with an additional 2 billion dollars borrowed after the pandemic) for just thirty nine months of the programme - an amount higher than the 30 billion dollars added by the PML-N during its five-year term.
Foreign exchange reserves no doubt strengthened by borrowing were estimated at 12.6 billion dollars on 13th August 2020 slightly higher than the 30th July figure of 12.542 billion dollars; however, these may partly be attributable to delays in payment of official foreign loans due to their deferral by the creditor nations as a consequence of the pandemic and partly due to the continued decline in imports though at the cost of lower output. Prices are rising inspite of inquiry reports/commissions, allegations of collusion leading to higher prices, and, last but not least, the rise in unemployment and poverty levels - indicators that have a direct political cost - indicators that were better during the PML-N tenure. It is about time the Prime Minister took cognizance of the entire macroeconomic picture rather than continuing to focus on the current account deficit and that too without looking at its composition.
Copyright Business Recorder, 2020
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