EDITORIAL: The State Bank of Pakistan’s (SBP’s) annual report 2022-23 uploaded on its website on Monday, reveals extremely disturbing macroeconomic indicators with unfortunately a marked tilt to blame external factors more than on poor policy decisions: the Russia-Ukraine war resulting in global monetary tightening with a lacklustre demand and the devastating 2022 floods generated “supply shocks”.
The report, however, did note that these external elements were compounded by the “impact of existing structural deficiencies that have marred a sustainable expansion of exports.” And while it further noted that the delay in the completion of the ninth review of the International Monetary Fund’s (IMF’s) Extended Fund Facility (EFF) programme that eventually led to its suspension with about 2.4 billion dollars remaining undisbursed, was an additional factor that contributed to the economy facing multiple challenges, it would have been befitting if it had also highlighted the extent of the damage to the economy due to persistent violation of the Fund conditions post-27 September 2022, to prevent the repetition of the same flawed policies that brought the economy to the brink of default.
The bare facts of the appalling state of the economy last fiscal year can be attributed to visible divergence from the seventh/eighth EFF review agreement of August to early September 2022, which was made four months after the Shehbaz Sharif-led government took oath, on the following counts: (i) cessation of inflows from all external sources including multilaterals, bilaterals and with the resultant downgrade in the country’s rating compromised the capacity to borrow from the commercial sector abroad or issue sukuk/Eurobonds; (ii) abandonment of the market-based exchange rate in favour of a controlled interbank rupee-dollar parity that led to multiple exchange rates, culminating in a resurgence of the hundi/hawala system that had been crippled after the global lockdown due to Covid-19 that cost the country 4 billion dollars in lower remittances through official channels; and as a consequence (iii) foreign exchange reserves quickly depleted compelling the SBP to introduce import restrictions while exports continued to fall in spite of the 110 billion rupee electricity subsidy to exporters (negative 14.1 percent) announced on 6 October and opposed by the IMF; (iv) exchange rate depreciated by negative 28.5 percent as per the report; however, no action has yet been taken by the SBP in terms of holding the eight banks identified as engaging in speculation last fiscal year though fiscal measures have been taken but these are not limited to the offending banks; (v) raising current expenditure by 26 percent relative to what was budgeted that led to an increased reliance on domestic borrowing with a consequent rise from the budgeted domestic debt servicing payments of a whopping 40 percent in the revised estimates, which accounts for a budget deficit, a highly inflationary policy, as unsustainable as was evident during the Covid years; this in turn led to (vi) crowding out private sector borrowing with a resulting decline in credit, an input, with consequences on output (growth for the year) estimated at plus 0.3 percent by the Finance Ministry and negative 0.5 percent by independent economists and multilaterals.
True; that administrative measures pertaining to utility tariffs, petroleum levy, shortfall in the targeted revenue due to lower growth than was budgeted for the year can be blamed squarely on the EFF signed off by the PTI (Pakistan Tehreek-e-Insaf) government, however, it needs to be acknowledged that failure of successive administrations to implement reforms in the power and tax sectors, dating back to at least three to four decades, is no longer acceptable to lenders, reflected in the ongoing SBA conditions which are expected to continue into the next programme, as well as the general public operating in the private sector reeling from a general price rise of 31.4 percent in September alone whereas the government sector salaries at the taxpayers’ expense have been keeping pace with inflation.
The report maintained that “SBP continued to tighten monetary policy stance amid rising inflation expectations, multi-decade high inflation outcomes and sustained pressures on the external account.”
It would have been appropriate for the SBP to present an academic research paper on why core inflation and not the consumer price index was used as a yardstick for setting the discount rate pre-2019 and why unlike in developed countries raising the discount rate has less impact on reducing inflation in Pakistan than limiting the government budget deficit specifically current expenditure outlays that should be accompanied by significant reduction in reliance on borrowings.
The SBP, in contrast to the Ministry of Finance, did manage to adhere to the Fund conditions by keeping the monetary policy tight though not tight enough – a contention supported by the emergency meeting on 26 June that decided to raise the discount rate by 100 basis points, a prior condition for the staff level agreement on the Stand-By Arrangement dated 29 June, as well as issuing a circular that purported to lift restrictions on imports.
The SBP has a well-respected research unit and it is disturbing to note that the thrust of the report remains on externalizing the reasons for poor macroeconomic performance.
In addition, the information contained in the report is dated; it has been released three months and 23 days after the end of last fiscal year in June, and is not a compelling treatise of what policies must be abandoned and what needs to be implemented that would take the economy out of the deepening impasse; it also lacks detailed analysis of what structural reforms must be expedited to ensure long-term positive impact on macroeconomic indicators.
One can only hope that the next annual report will take account of these concerns and make a positive contribution towards identifying the malaise that besets domestic policy decisions and how best to overcome them.
Copyright Business Recorder, 2023
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