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ANOTHER week of mixed messages on the economy has just passed. The week began with an announcement from the IMF, one of the most important external watchdogs on economic developments, saying that it is “encouraged by the overall progress” being made by the government towards stabilising the economy and reviving growth and investment.
But the statement hides behind generalities. The reform programme, for instance, is “broadly on track”. Economic indicators are “generally improving”. Is the government prepared to take the tough choices that necessarily lie ahead to sustain this “generally improving” state of affairs? The Fund “recognises the authorities’ determination” to push ahead.
Some of the assessments have left people a little puzzled. For instance, the Fund is clear on the fiscal side, saying revenue performance was “strong during the first nine months of the year”, although it adds an important observation that there is “an emerging revenue shortfall in April”. This might be an obvious question, but how can the performance be termed “strong” if a revenue shortfall is “emerging”?
On the same day that the Fund’s press release was issued, at least two papers carried a news item claiming that the revenue target for the current fiscal year has been revised downward one more time (the last downward revision was in September). In the budget approved in June 2013, the revenue target had been set at Rs2.475 trillion, which was revised down to Rs2.345tr in September.
Now, as per reports that trickled in at the same time as the press release, the target has been revised down further to Rs2.275tr, a reduction of Rs200 billion. The press statement from the Fund, however, made no mention of this, noting only a “strong revenue performance” with an “emerging revenue shortfall”.
At least one newspaper that closely follows the macroeconomic scene and the Fund discussions is not impressed. In an editorial, they advanced the rather unkind view that the Fund has become “an enabler of the FBR’s [Federal Board of Revenue] gross incompetence”.
I say unkind because the reports that brought news of the second downward revision also carried the reason behind why it became necessary. Apparently, the rising value of the rupee negatively impacted customs and excise collections, because as the rupee rose relative to the dollar in February, the rupee value of imports landing at the port went down, meaning the assessed value of the cargoes was lower than expected and as a result the amount of tax assessed was also lower.
Fair enough, but let’s also acknowledge another thing here. The finance minister went on record as early as December saying he wanted the rupee at 98 to a dollar, and follow-up statements and developments since then have shown that this was not empty rhetoric. Therefore, was December not the right time to ask what impact a rising rupee will have on the fiscal framework? Was this asked during the second review that the Fund had with the government in February?
In any event, where the finance minister was quick to point out the savings that a stronger rupee would bring in debt servicing costs, not a word was said about its impact on the fiscal framework.
To add to the mixed messaging, Moody’s also gave an assessment of the government’s track record, saying that risks facing the country had in fact increased, citing a “weakened external position and large government financing needs”.
“[L]arge fiscal imbalances and debt structure weaknesses, coupled with a narrow tax base and heavy reliance on the banking system for deficit financing will likely remain credit constraints,” said the credit rating agency.
Basically, Moody’s pointed out something that the Fund has been too shy to mention thus far: the turnaround in the country’s economic fundamentals has been purchased with borrowed money, and if structural changes don’t accompany this trend, the underlying weaknesses of the economy will make it difficult to carry this heightened debt burden for very long.
Now the Fund has thrown the ball in the State Bank of Pakistan’s (SBP) court, which is due to announce its monetary policy on Friday, capping the week of mixed messages. This will be the first time the central bank will speak after getting a new governor, who is widely perceived to be beholden to his political benefactors.
The Fund has given it an opening by saying that inflation remains an important risk. “The mission urged the SBP to remain vigilant on recent inflationary pressures,” said the Fund, without elaborating on where these inflationary pressures might be coming from.
Will the State Bank add some clarity to the picture? Is the economic turnaround all that it is cut out to be, or are there important caveats lurking below the surface? If they want to go along with the story the government is telling, they’ll need to answer one key question: why is the improving economic picture not reflected in an improving credit rating? Are the rating agencies playing politics? Or are those tasked with vigilance themselves derelict in their obligations?
When institutions speak, it’s always worthwhile to listen closely. The Fund has, thus far, failed to go the full distance to discharge its obligation to provide a clean and impartial picture of the state of the economy. Now it’s the turn of the State Bank to step up to the plate and speak. Rest assured, we’ll be listening carefully.
The writer is a business journalist and 2013-2014 Pakistan Scholar at the Woodrow Wilson Centre, Washington D.C.
Twitter: @khurramhusain
Published in Dawn, May 15th, 2014
