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Numbers are deceptive and forecasts are dangerous in unpredictable scenarios. Back in 2008, when oil prices were racing over $100 per barrel, forecasts of big global houses were approaching $200/bbl, a few months down the road prices nosedived, and the same houses reports were professing lows of $25/bbl. In reality, the prices settled somewhere in between for the next few years.
In recent times, the Fed was forecasting a few rate hikes back in 2018, and now there are talks of cuts actually. When Fed in a highly documented economy of the US could be wrong in predicting near future numbers, how can one be sure of the gloom being presented for Pakistan by multilateral lending agencies.
A year ago, the IMF projected 4.7 and 4.9 percent GDP growth for FY19 and FY20 respectively, now this has been revised downwards to 2.9 percent and 2.7 percent. You never know, what numbers would be circulating next April. A usual commonality in all the forecasts is that these are driven by the market sentiments at the time of making. The oil prices prediction example is a classic demonstration. Today, the global economies are slowing down and the IMF is forecasting numerous economies to slowdown in next two years, and even beyond. For instance, IMF is predicating Pakistan economy to grow by 2.4percent in 2024.
A couple of years back when sentiments were of high growth, the economic stresses were ignored by many. In the case of Pakistan, external economic pressures had started exerting in the start of 2017, but the momentum was of 'tezi' (bullish), and there was no domestic or international research house that predicted that current account deficit would be over 6 percent of GDP in FY18. Even the SBP was behind the curve - State of the Economy report released in Mar18- three months prior to year end, forecast the current account deficit between 4-5 percent of GDP. The IMF estimates were no different.
Now the season is of 'mandi' (bearish). Without getting into the trap of forecasting numbers, one can easily assert that coming six months are tough. The impact of currency adjustment and interest rate hike is trickling down to the consumers and SMEs. People are feeling the brunt and more pains are to be handled in months to come.
There was a twin deficit problem the government had to deal with. On external front, the tightening is paying dividends in terms of lowering monthly current account deficit. In simple words, every month, economy was draining $2 billion on recurring expenses which has now reduced to around $500 million per month. That is manageable. The cost is being paid in terms of loss in employment and growth and higher imported inflation. The consensus is that further tightening could be counterproductive and still the impact of adjustments has not fully translated into numbers.
The government is paying the cost of adjustments in terms of losing popularity, but the problem is becoming worse with falling expectations on government's ability to introduce real reforms. Without doing so, history suggests, that a similar crisis will resurface in a few years. The FM thinks that in the third year of the government, the growth will start picking up, but without reforms, this growth would be short-lived, if there is any.
The first and foremost challenge is to curtail the fiscal deficit which according to the IMF will surpass 7 percent of GDP this year. The Fund may not be too off in this forecast as nine months tax numbers are suggesting the same. The fearsome prediction of the IMF is that the next year deficit would be over 8 percent of GDP. That could be lethal.
But one may wonder how the Fund is coming up with this number as on the revenues front, the IMF may put a condition of 30-40 percent growth, by how much is the Fund expected the expenditure to grow. There is a forecast of 13.5 percent inflation next year by multilateral institutions, and to counter that, the interest rates may be assumed to be over 15 percent, and that could significantly increase the debt servicing cost.
The question is, will the average inflation be 13.5 percent next year? That is against the market expectation. To date, the inflationary impact of depreciation is not pronounced as the commodity prices in Pakistan were at a discount from international prices. Now we are at parity, and any further currency devaluation would bring high inflation home.
Since fiscal house is not coming in order, the doctor's prescription would be further tightening, but seeing the economic reality at home, this will widen the fiscal deficit before improving. The urgent need is to focus on fiscal woes. In economic slowdown, it is hard to increase tax revenues. The goal should be to fetch non tax revenues and plug in losses. Privatising PSEs should become the top priority. The government did not have this in the to-do list till as recent as last week. Refreshingly, the recently issued Medium-term Economic Framework does have privatization of SOEs on priority. The plan is to sell government land to generate revenues and unlock the economic potential, and to renew telecom licenses. These might not be enough. The government has to have an out of the box solution, but nothing of the sort is in sight.

Copyright Business Recorder, 2019


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