So what is the state of Pakistan's economy? Is it the dire prognosis of the analysts, supported by the Ministry of Finance, who have laid the blame squarely on the resistance by the opposition and coalition partners alike to implement the reform agenda as negotiated between the International Monetary Fund (IMF) and the government of Pakistan, an assertion whose credibility is evident given the stalled IMF Stand-By Arrangement (SBA) since the past six months? Or is it the rosy picture that is being highlighted by the PPP Co-chairperson President Asif Ali Zardari and his appointed Prime Minister Yousuf Raza Gilani?
The President has focused attention on three achievements as proof positive that his government's policies are succeeding. First, he points out that the current account improved significantly during the last three years: from negative 7.24 billion dollars in 2009 to negative 1.82 billion dollars in 2010 to negative 0.50 billion dollars in 2011 according to the latest quarterly State Bank report. The reason was an increase in remittances (from 2.97 billion dollars in 2009 to 3.83 billion dollars in 2010 to 4.43 billion dollars in 2011) and an increase in export earnings (from 8.65 billion dollars in 2009 to 7.70 billion dollars in 2010 to 9.03 billion dollars in 2011). His claim that this is a reflection of the improved business environment as a consequence of his government's policies is not supported by the facts on the ground.
The State Bank argues that remittances rose due to (i) the government and the SBP's efforts to attract remittances through the legal banking channels. The government role referred to, is the 'crackdown by the law enforcement agencies on some of the big exchange companies including Zarco and Khanani and Kalia' that contributed at least initially to a rise in remittances through legal channels. And policy changes identified by the SBP included real interbank fund transfer facility, cash over counter facility and direct debit facility in the beneficiary's account. However, it stands to reason that external factors also contributed to a rise in remittances including the historically low interest rates prevalent in developed countries, from where the bulk of our remittances come, plus the Saudi government's decision to ban Bangladeshi workers that accounts for the hiring of more Pakistani workers. The impact of these actions/decisions (apart from policy changes by the SBP) would be limited in time with remittance income unlikely to rise in percentage terms in years to come and would actually decline if the government takes the decision to tax remittance income if used for investment purposes; (ii) seasonal increase due to Eid/festivals expected to continue; and (iii) expatriates increased support for flood victims much of which came to private charities through the legal system. These factors indicate that even though remittance inflow maybe sustained in the forthcoming fiscal year, yet none of the three factors are likely to increase the percentage inflow in years to come.
Exports rose due to higher unit prices of our major export items as well as higher demand due to poor crop output in several countries due to floods/landslides etc. The total percentage increase in the current fiscal year (July-December) in comparison to the comparable period the year before was a hefty 23.7 percent while import growth was about half at 12.8 percent. These figures too may undergo a dramatic change with the steady rise in oil prices that would raise our import bill and a decline in exports as the price of our major farm exports in the international market decline.
Disturbingly, the financial account balance, a component of the current account balance declined significantly (July-November figures): from 4.3 billion dollars in 2008 to 2.2 billion dollars in 2010 to 462 million dollars in 2011. Its components included Foreign Direct Investment (FDI) that during the period under review declined from an appallingly low to almost negligible level (from 1.62 billion dollars in 2009 to 0.57 billion dollars in 2011) and foreign portfolio investment (FPI) declined from 301 million dollars in 2010 to 173 million dollars in 2011. The reason according to the State Bank quarterly report is that "a large part of this decline is explained by the sharp fall in other investments despite the emergency loan of US $453 million given by the IMF. This fall in other investments was expected as increase in other investment last year was due to the Special Drawing Rights and bridge financing from the IMF...the fall in FDI was the continuation of last two year's trend; low investment in equity and outflows from debt securities explain the falling FPI." And the decline in other investment in the first half of the current year is noted as negative 93.7 percent by the SBP, a figure that is truly disturbing. The reason is lower net loan inflows and the substantial increase in non-repatriation of export bills. The SBP report adds that "weak economic growth, poor security situation, circular debt and energy crisis have limited the profitability of foreign investors in Pakistan, reflected by sharp fall in reinvested earnings, thereby accounting for a 36 percent decline in FDI flows between July 2010-February 2011)".
Thus claims by the President and the Prime Minister that the external account posted a surplus are correct but the underlying rationale ie that it is due to domestic policies is not supported given the underlying issues that continue to plague the economy and which are still not being dealt with.
Second, the government claims that the rupee has been relatively stable in recent months. This is again correct however the reason as per SBP report is not only "improvement in the country's external account," but the "rupee's relative stability also owes to the weakening US dollar against other major world currencies."
Third, the country's executive has also been at pains to claim a successful farm policy that has accounted for large surpluses due to the high support price for some crops, notably wheat, our staple. True but this needs to be taken in conjunction with two related facts: (i) food inflation is on the rise and one is compelled to recall the words of Herbinger of the World Food Programme who accepted that there has been a rise in food output but averred that the people are poorer and unable to purchase food at the available price. And (ii) government indecision was evident when large wheat stocks purchased at a price higher than in the international market implied that the government would have to subsidise wheat exports to make way for the next season's crop. It is also noteworthy that large wheat stocks out in the open were destroyed during the August devastating floods.
The IMF in a statement on its website on 12 April, one day prior to the arrival of Dr Hafeez Sheikh in Washington DC to attend the IMF/World Bank summer meetings was very critical of the government compliance record and indirectly accused the current batch of economic managers of retarding and/or reversing the reform agenda during 2010 and 2011 in contrast to the previous years when Shaukat Tarin held the portfolio of Finance: a policy option that the IMF statement claims led to high rates of inflation. And while few in this country support the IMF prescriptions, especially with respect to increasing utility rates, yet one would be hard pressed to challenge its assessment of our economy.