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WHAT do you do when the words tell you one thing but the numbers say another? For example, in its latest statement following the conclusion of talks with the government, the IMF says that “private sector credit offtake has been expanding at a robust pace”.
The words come after a series of sentences that paint an upbeat picture of what’s happening in the economy, words that tell us that the Fund is “encouraged” by output growth, that indicators on the health of the economy are “improving”.
Offtake of credit by the private sector is used as a key barometer of industrial activity because it is a key measure of how much activity is taking place. If the private sector is borrowing, then it means the letters of credit are being opened, working capital is being drawn, investment activity is taking place.
Apparently coming on track on economic issues requires sorting out some residual business first.
But here’s the kick. Private-sector credit offtake in the period between July and the end of October came in around Rs4.8 billion, whereas the same figure stood at Rs32bn in the same period last year. So where’s the “robust pace” of expansion? For perspective, back in healthier times this figure used to come in the hundreds of billions of rupees. I know textile mill owners in Faisalabad who could probably write a cheque for Rs4.8bn, so it’s a little puzzling to have to regard that miserly figure as “robust” expansion in the pace of growth of the country’s industrial output.
Inflation is coming down, notes the statement. Perhaps we’ll know more about how exactly this is happening in the more detailed report the Fund is scheduled to release end of December following the board’s approval. But nobody should get their hopes up about a possible cut in interest rates as a consequence, because the Fund feels assured that the State Bank “remains committed to a prudent monetary policy”.
It appears some unfinished business remains between now and end December, when the board will decide whether to approve release of funds. “The authorities are committed to taking the necessary corrective actions for missed targets,” says the Fund, going on to add that “with these actions, they will be on-track to meet their objectives for end-December”.
Apparently coming on track requires sorting out some residual business first. Some clues are provided in a footnote that mentions a few technical items such as the target for net domestic assets, which is commonly missed in these reviews. But interestingly enough, another item mentioned is the target on net international reserves (NIR).
Between the lines, the Fund continues to caution against the temptation to pursue an overvalued exchange rate, laying some emphasis on careful management of the foreign exchange reserves. In one place it mentions setting interest rates with an eye on the reserves, and then comes the footnote that points to the NIR target saying some strengthening is required in this area. In the past this language has meant pressure on the State Bank to purchase dollars from the open market to build up reserves. We’ll see what it means in the present context.
An alarming drop in exports gets squeamish mention in one place, where the current account deficit is described as “somewhat higher than expected”. What lies behind this drop in exports? Is demand in the advanced industrial economies somewhat lower than expected, or is the shortage of energy somewhat more problematic than expected? Are the export industries stuck in a supply bottleneck, or is demand in prime export destination countries more restrained given their circumstances?
We don’t know at this point. Perhaps the full report in December will tell us a little more, though that expectation might be somewhat higher than what the facts will allow.
In the power sector, the Fund calls on the government to “continue tariff reforms while containing price increases to the consumer”. How exactly is this to be achieved? Can power tariffs be reformed without increasing the price to the consumer? There is one way: if the government raises tariffs but lowers fuel adjustment surcharge in light of the fall in the price of oil in international markets, as well as removal of the so-called equalisation surcharge.
Basically, the government pulled a couple of rabbits out of its hat in the days leading up to the talks with the Fund, by reversing all tariff increases but also pocketing the advantage from the fall in oil prices. This allowed the government to increase recoveries without tariff increases, because the increases came under heads other than the tariff.
The net result was still “price increases to the consumers”, but no real reform of the tariff. It appears the Fund is asking the government to reverse this treatment, by increasing tariffs and decreasing other miscellaneous charges tacked on to the consumers’ bills.
Not a whiff of a hint is given regarding the reasons behind why the fourth review was delayed. A lay reader is entitled to wonder why the fourth and fifth reviews are being clumped together. The same lay reader is the ultimate stakeholder in the entire exercise, since it is he or she that will bear the ultimate cost. Thus far, a clear answer is nowhere to be found, leaving the field wide open for speculation.
For his part, the finance minister preferred to read out State Bank documents that are already available on the website rather than address any of the important issues in connection with the programme talks. Most of the questions he fielded following his talk yesterday were political in nature, showing that the dharnas may have receded but the issues arising out of them remain a favourite topic of conversation.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, November 13th, 2014
