What prompted me to write this article? The readers would recall that the country's finance minister visited Karachi last week. During his stay in Karachi, he addressed the business community at the Federation of Pakistan Chambers of Commerce and Industry (FPCCI). One would expect that the country's finance minister would have presented the true picture of the economy. Instead, he wasn't truthful to the private sector of the country.
In this article, I would comment on three points of his address to the business community in Karachi. Firstly, "with government's positive measures, all major macroeconomic indicators are moving in the right direction and the country's economy will post a 5 percent GDP growth rate by end of this fiscal year". Secondly, "the large-scale manufacturing (LSM) has performed well during the initial months of this fiscal year". Thirdly, "external debt stood at $47 billion in 2013, when the country's foreign exchange reserves were some $6 billion, while presently it stood at $57 billion when the country's foreign exchange reserves are $23 billion.
On the first point, the finance minister was not stating the facts. The facts are that the LSM is stagnating at 2.0 percent growth for the last five months (more discussion on this, shortly), private sector is still shy and borrowing little to expand their businesses despite the fact that the commercial banks are full with liquidity and interest rate environment has never been so benign, tax collection by the FBR has simply collapsed, unemployment situation is worsening by each passing day, and government's borrowing from the State Bank of Pakistan (SBP) has returned with full vengeance.
Exports, remittances and the FDI are on the decline (because of the one-off transaction from the Netherlands, amounting to $460 million in December 2016 show and overall increase in FDI by 10.4 percent during July-December 2016. Excluding this one-off transaction, FDI during July-December 2016 amounted to $621 million or down by 35.5 percent during the period). Debt is on the rise with a threatening pace and the foreign exchange reserves have declined by $656 million in two months (between October to December).
Reforms which were "broadly on track" during the IMF programme appear to have evaporated. In fact, the process of rolling back of reforms has begun -classic examples include the winding up of regulatory bodies. The Finance Minister did not present these facts to the business community.
On the second point, the finance minister appears to have been misguided by reading the large-scale manufacturing number for the month of November 2016. The Pakistan Bureau of Statistics (PBS) has released the LSM number for November 2016, which suggests that the LSM has grown by 8.0 percent as compared with the same month last year. This number has prompted finance minister to say that "the LSM has performed well during the initial months of this fiscal year".
What is the factual position of the performance of the LSM during the initial months of this fiscal year?
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Table: Performance of Large-Scale Manufacturing
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(March - November 2016 (Growth %)
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March 2016 7.4
April -2.9
May -1.1
June -0.4
July 1.7
August 2.5
Sept 1.5
Oct 2.5
Nov 2016 8.0 (2.1)
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Source: Pakistan Bureau of Statistics
In order to achieve the "desired" real GDP growth rate of close to 5 percent in 2015-16 (last year), the LSM index exhibited a rising trend, starting from November 2015 and reaching to a peak in March 2016 when it grew by 7.4 percent. The government achieved its "desired" real GDP growth number (4.7%) for 2015-16. Once the job was done, the LSM simply collapsed thereafter, as can be seen from the Table.
What happened to the industrial growth overnight? Why it collapsed during April-June 2016? Why the factors that were identified in accelerating LSM growth, simply evaporated during the last quarter of the fiscal year? There is no answer from the government as yet.
During the first four months (July-October) of the current fiscal year (2016-17), LSM grew, on average, 2.0 percent per annum (see Table). In the month of November 2016, the LSM growth, all of a sudden, surges to 8.0 percent and as such the July-November 2016 number averaged 3.2 percent. What happened in November 2016? Very simple! Sugar is the largest industry in the food, beverages and tobacco group of industries with its overall weight of 3.54 percent.
Sugarcane crushing season in the country begins in October and ends in March. Last year, because of the dispute of the sugarcane prices, crushing season got delayed and only 8148 tons sugar was produced in November. This year, sugarcane crushing season started in November and accordingly, the mills produced 210,278 tons of sugar, thereby registering a growth of 2480 percent. This phenomenal jump in growth was the key factor contributing to 8.0 percent growth in LSM in November and 3.24 percent in July-November 2016. Adjusting for this sharp jump, the LSM growth for the month of November comes down to 2.1 percent - very much in line with July-October numbers. Furthermore, July-November LSM growth averages 2.6 percent as opposed to 3.24 percent (See Table). Furthermore, taking a bit longer view, LSM has grown at an average rate of 0.7 percent during April-November 2016.
Two things need to be stated here. The PBS, by reporting such idiosyncratic number, has misguided the people in general and finance minister in particular who in turn, misguided the people through his address to the business community in Karachi. Secondly, the PBS should either have reported LSM number without sugar production or should at least, have pointed out in the text about the extraordinary jump in the number. They did not do either and accordingly they were not transparent. Had there been any professional statistician heading the PBS, he/she would not have committed such blunder. It appears that the government was keen in painting a picture, which suggested the revival of the manufacturing activities in the country. Such gimmickries do not work.
On third point, once again the finance minister tried to misguide the public in general and business community in particular. Two things to be noted here. First, the finance minister has his own definition of debt which is different from the one used in Pakistan historically as well as by the international financial institutions, therefore, we should not take his number seriously. The factual position is that Pakistan's external debt and liabilities were $60.9 billion in June 2013 and $73 billion in June 2016.
Secondly, while comparing his own debt number in relation to foreign exchange reserves, he stated that the external debt stood at $47 billion in 2013 (end-June 2013) when the country's foreign exchange reserves were $6 billion and presently external debt stood at $57 billion (end-June 2016) and foreign exchange reserves are $23 billion. The Finance Minister was factually wrong. When he stated that the foreign exchange reserves were $6 billion, he only mentioned the reserves of the State Bank of Pakistan and when he talked about reserves being $23 billion today, he stated the combined reserves of the SBP and the reserves held by the commercial banks.
The Finance Minister should be careful in stating economic statistics. By presenting a rosy picture of the economy when it is not there, he simply loses his credibility. My advice to the finance minister is that he should remain transparent and avoid gimmickries.
(The writer is Principal and Dean at NUST School of Social Sciences & Humanities, Islamabad. Email: ahkhan@s3h.nust.edu.pk)
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