SBP assessment

The State Bank of Pakistan's (SBP's) recent report reveals deterioration in debt sustainability indicators due to higher external debt and liabilities to Gross Domestic Product (GDP) ratio: from 27.4 percent in 2017 to 33.5 percent in 2018 to 45 percent by June 2019. However, going forward, the SBP projects an improvement in the current account balance and in non-debt inflows - foreign direct investment inflows that as per SBP data declined from 806.5 million dollars July-September 2019 to 762.9 million dollars in the comparable period of 2020; and portfolio investment, hot money, which rose by 240 million dollars, a pittance compared to the price that the country is paying for the 13.25 percent discount rate set by SBP in July this year including a 7 percent decline in manufacturing output, with a consequent negative impact on growth and employment opportunities, and a rise in government debt annual repayments. Needless to add, hot money is as quick to enter an economy as it is to exit it, one of the factors that led to the 1997 Asian financial crisis.

The projection that there will be a rise in non-debt inflows has been repeatedly made by the country's economic team. However the optimism of the two economic team leaders - Dr Hafeez Sheikh and Dr Reza Baqir - is clearly misplaced given the release of disturbing macroeconomic data nearly six months after they reached a staff level agreement with the IMF on 12 May, inclusive of the decline in deposits by a whopping 415 billion rupees, attributable to high inflation, and a disturbing contraction in the growth rate.

The defense of the two economic team leaders is three-fold. First that the picture would correct itself in the long term, though neither specifies precisely how long the term would be; however the IMF has projected in its report that the upturn in the economy would begin after the completion of the ongoing programme which is September 2022 - a period that would simply not be acceptable to any government given that our poverty levels are already high and rising. In this context one would caution the Cabinet to be alert to data released by the Pakistan Bureau of Statistics (PBS).

Secondly, their projections are becoming increasingly unrealistic. Hafeez Sheikh has gone on record as stating that the projected growth rate of 2.4 percent, projected by the IMF and in the budget 2019-20 that he finalized, would be surpassed and would be closer to 3 percent - an optimism that is not backed by data released by PBS. Baqir on other hand is maintaining inaccurately that exports are actually rising in volume, an indication of higher productivity. Rice and only rice exports have risen in volume, an item whose output is dependent on weather conditions and market price, while all other major exports have decreased in volume as per data released by the government.

And finally, both Sheikh and Baqir are at pains at every forum, domestic and international, to project their credentials as employees of international donor agencies. This is indeed very unfortunate because whatever positions they may have held, and this holds more true for Sheikh than Baqir who held a mid level position in the IMF, the positions they hold at present far outweigh what they held previously in prestige, emoluments and, what is perhaps the most important element, in giving them an opportunity to go down in economic history as turning Pakistan's economy around. Their adherence to the IMF programme, with a penchant for over correction - Sheikh in setting an unrealistic tax revenue target and Baqir in supporting an undervalued rupee (by around 7 percent at present) as well as an unsustainably high discount rate - is unlikely to be appreciated by academicians and independent economists, though one would assume that the IMF would be pleased.