EDITORIAL: The World Bank has projected a growth rate of 0.5 percent, with the global economy rising by 4 percent, whereas the State Bank of Pakistan (SBP) has projected a rate of between 1.5 to 2.5 percent for the current year. One percentage point constitutes 445 billion rupees in terms of actual Gross Domestic Product (GDP) which, in turn, determines key macroeconomic indicators including revenue, tax and non-tax, as a percentage of GDP, fiscal balance, primary balance and debt to GDP ratio; therefore this difference raises questions about capacity or deliberate over estimation of growth projections which is the usual forte of politicians instead of the central bank whose mandate is to focus exclusively on economic data and considerations.
The SBP disturbingly gives a range of between 1.5 to 2.5 percent, a range that is reminiscent of the International Monetary Fund’s (IMF’s) estimation of rupee over-valuation (between 5 to 20 percent) in a quarterly mandatory review of the Extended Fund Facility (EFF) programme loan during the tenure of the previous government—PML-N’s. While the 15 percent range is considerably greater than the one to two percent GDP range yet the impact of the two in terms of actual numbers on the economy is perhaps comparable.
The SBP also refers to the “downside risk” to the growth projection based on its assessment that “the economy is faced with uncertainty related to intensification of the second wave of the pandemic”. Downside is a word much in use in multilaterals analyses of member countries’ economies and is defined as a one-sided test since the upside potential due to policy decisions, if any, is not always taken into consideration.
SBP’s analysis, in contrast to a projection by a multilateral, should have focused not only on a more comprehensive itemization of downside risks but also upside risks. Downside risks should have included severe gas shortages to the productive sectors with negative implications on exports as well as supply of products in the domestic market instead of merely mentioning supply-side risks from “uncertain weather conditions”, with an earlier SBP report highlighting supply-side shocks due to market manipulation by cartels – a charge leveled constantly by the Prime Minister. The sustained failure of the government to supply electricity at tariffs comparable to that of their regional competitors is also a downside risk.
The upside risks - fiscal and monetary incentives meted out to the construction sector/export sectors as well as to the housing sectors at a cost to the rest of the economy were noted by the SBP however these measures were at the Prime Minister’s personal initiative; the SBP report noted the potential upside risk of “development and distribution of an effective vaccine and its possible early availability” - a comment inexplicable in a country where a vaccine is not under preparation though trials of the Chinese vaccine are under way and reliance is expected to be exclusively on imports.
The SBP report was also evocative of a usual IMF focus wherein it stated that “the improvement in various economic indicators during 1QFY21 is encouraging. However its contribution in the short term depends to a large extent on the trajectory of the pandemic, while sustainable growth over the medium term would require progress on the structural reforms front.” There is absolutely no disagreement with the IMF that structural reforms particularly in the sustained appalling performance of the tax and the energy sectors are critical to turning the economy around yet one would have hoped that the SBP would have focused on its own contribution to the low growth rate in 2019-20 – projected at 1.5 percent by the IMF and the budget due to severe contractionary policies of the SBP and the finance ministry. To state that the country is back on the low growth trajectory of last year is perhaps an indication that the Bank intends to revert to its contractionary policies of last year. This is supported by the World Bank projection of a lower growth rate for Pakistan - lower by 3.5 percent compared to the global growth rate of 4 percent.
And finally, the SBP and multilaterals are agreed that remittance inflows would decline in years to come with the SBP noting that remittances are subject to risk from the outlook of the GCC economies whose fiscal balances might further deteriorate with the escalation in the Covid-19 infections. The World Bank, a few months ago, projected that the outlook for remittances would remain uncertain given “the impact of COVID-19 on the outlook for global growth and on the measures to restrain the spread of the disease. In the past, remittances have been counter-cyclical, where workers send more money home in times of crisis and hardship back home. This time, however, the pandemic has affected all countries, creating additional uncertainties.” In this context, it is relevant to note that remittances to Pakistan rose during the first six months of the year in comparison to the year before. It is, therefore, hoped that the SBP would take a more holistic approach and apply its own yardstick to assess the impact of various external and internal factors on the state of the domestic economy and while review of the projections of multilaterals is desirable yet reliance on their assessment must not be pervasive.
Copyright Business Recorder, 2021