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EDITORIAL: Federal Minister of Information Shibli Faraz while briefing the media on cabinet decisions has stated that the Minister for Planning, Development, Reforms and Special Initiatives Asad Umer stated during the meeting that all economic indicators were good barring inflation. The “good” indicators Umer noted included five major claims.

First, contraction of the current account deficit, achieved through severe contractionary fiscal and monetary policies that choked off economic activity last fiscal year accounting for a projection of 1.5 percent growth rate pre-Covid-19 (and negative 0.4 percent post Covid19). Second, a resurgence of large scale manufacturing (LSM) sector growth post Covid-19 attributed to the catch up of stalled domestic demand during the lockdown months which has fuelled car sales, construction sector growth due to the amnesty scheme valid till end of the current calendar year and a rise in steel and cement sales also associated with the construction sector. In other words, growth of LSM is mainly associated with automobile and construction sectors and one would hope that these sectors spearhead growth in other sectors as well.

Third, a stable exchange rate. Trade data recently released notes that the rupee value vis-a-vis the dollar on average continues to fluctuate and in August 2020 was 167.7, while in September it was 166.2; however, the more concerning fact for the cabinet must be to assess whether the rupee is over- or undervalued – in effect to look at the data on real effective exchange rate (REER). As a comparison it is relevant to note that in June 2018 during Ishaq Dar’s tenure as finance minister when he was artificially propping up the value of the rupee thereby depleting foreign exchange reserves, a patently flawed policy, the SBP website noted the REER at 121; however in June 2020 the last month for which the SBP assessed the REER it was 93. This should be a source of concern for the cabinet and one would hope that it would urge the Governor SBP to direct his research wing to evaluate whether the rupee is over- or undervalued.

Fourth, Umer claimed positive signs of foreign direct investment (FDI). A comparison of the August data as uploaded on the SBP website indicates that in August this year Pakistan was the recipient of 109 million dollars FDI, in August 2019 the figure was 162 million dollars, in August 2018, 278 million dollars and in August 2017 Pakistan was the recipient of 757 million dollars FDI. In addition, it is unclear whether the FDI is for the China Pakistan Economic Corridor (CPEC) projects which are funded through loans with a government guarantee.

And finally, Umer informed his cabinet colleagues that the foreign exchange reserves were at a comfortable 20 billion dollars. This would indeed be a comfortable amount if as per the definition of reserves this amount was held by the SBP. The actual amount held by SBP was 12.3 billion dollars in September 2020 and while this is certainly an improvement over the 10 billion dollars that the Khan administration inherited yet actual foreign debt has risen substantially (projected by the economic team leaders to rise by around 38 billion dollars during the duration of the thirtynine-month IMF programme that began on 1 July 2019) as has domestic debt.

One would have to agree with Umer when he noted that inflation was a source of concern. There was a demonstration by federal employees on Tuesday demanding a raise in their salaries which incidentally were not raised for the first time in decades as per IMF’s insistence. The Fund’s objective was to contain the budget deficit that remained at an unsustainable 8 percent last year and is projected at an unsustainable and unrealistic 7 percent in the current year (unrealistic because the growth rate is clearly overstated by one percent if multilateral projections are taken into account and the revenue target is unachievable as per FBR sources); however, the government could have better negotiated with the IMF through reducing current expenditure which has been contained only to the extent of not repaying foreign debt as and when due – a reprieve granted by bilaterals to developing countries.

Inflation is also rising due to the decision to achieve full cost recovery with respect to utilities, a decision that can be supported but it must be accompanied by improvement in governance which remains a pipedream, a high discount rate (at 7 percent the rate remains well above the rate prevalent in other countries) and failure to deal with cartels/manufacturers while accusing them of being members of a mafia. Needless to say that inflation in general and food inflation which is the main contributor in the present instance, in particular hits all and sundry and has a debilitating impact on the Kitchen budgets of the lower segments in the economic ladder. Showcasing improvement in macroeconomic fundamentals cuts no ice with people if they are unable to feed themselves and their children.

Copyright Business Recorder, 2020


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