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This week a draught of fresh air wafted through a closed room. First, we had a statement from the State Bank governor telling us that CPEC projects “need more transparency”. And a few days later, we heard the Planning Commission tell us that the government’s economic track record remains more window dressing than reality.
Okay, I confess, the second part is my own spin. The Planning Commission didn’t exactly say ‘window dressing’ when describing the economic track record.
The Planning Commission statement was given during a midterm review of the government’s performance. The review was candid in asserting that the government’s “success has largely been in stabilising the economy but the structural challenges remain”.
A breath of fresh air has wafted through the economic dialogue this week. Now we wait to see how the finance minister and his team react to these words.
Two key areas where the government’s performance is stubbornly not showing results are in investment — both foreign and domestic — and exports. The failures in both areas are due to a mix of factors, some within the governments control, others not.
The mix of factors used to explain this failure has been skilfully chosen to lay the emphasis on those elements that are beyond the government’s control. The State Bank has dutifully echoed the government’s desire to place the emphasis on factors like falling international commodity prices, and away from factors such as energy — pricing and supply — as well as the exchange rate. This is the first time that we read a list of reasons for why exports are falling that was comprehensive. Here is how the Planning Commission explained the fall.
“The exports have plunged due to the energy crisis, overvalued rupee, burdensome taxation and regulatory duties, liquidity crunch due to pending tax refunds and declining private-sector credit.” Falling commodity prices were also a factor, but only one in a long list of reasons weighing down our exports.
The commission also noted declining foreign investment and rising external indebtedness, another structural imbalance that the State Bank has struggled to explain in subsequent monetary policy announcements.
A disagreement between the Planning Commission and the finance ministry over employment data already played out a few months ago. The commission reiterated its position that there may well have been a slight uptick in the growth rate, but its impact on employment has not been significant, with unemployment only rising rather than falling.
None of this is reason to start gnashing our teeth at the government. It is simply an honest appraisal of the challenges facing anybody who would find themselves coming to power in 2013, when reserves had plunged to dangerous levels and the circular debt had risen to the point of crippling power production in the country.
The government did, indeed, take that bull by the horns and undertake the steps required to halt the slide towards a potential crisis. They took fire for those steps, but today, it is indeed a fact that reserves sit at comfortable levels and the power system chugs along without a sense of impending doom hanging over us all.
What the honest appraisal by the Planning Commission tells us is that these steps were only meant to be the beginning. They needed to have been followed up with further steps to put the economy on a more sound footing, and that hasn’t happened.
Not yet anyway; let’s remember there are still two more years to go.
Sound footing means a revival in the country’s earnings of foreign exchange from real economic activity, like exports and foreign investment, and a move away from reliance on borrowing and other forms of bilateral inflows. That hasn’t happened, so we have only half the tale when we mention just the stabilisation measures but not the gaping deficits that continue to eat away at the reserves and the fiscal framework. The currents are still pushing us towards the crisis that we were drifting towards in 2013, and steering the ship of state towards calmer waters remains an unfinished agenda.
The State Bank also breathed a little fresh air into the otherwise claustrophobic dialogue that has been shaping up around economy issues of late. It was becoming a bit tiring to keep pointing out the bank’s pusillanimity in addressing key concerns in the economy, so to hear the State Bank governor himself admit that vital transparency issues hang over the crucial CPEC projects felt good. Although going over the remarks, one gets the impression that it took some skilful questioning from the interviewer to extract this language from him.
Be that as it may, the fact that the governor does not know, by his own admission, about crucial financing details connected with this project — such as how much of them are debt and how much equity — means that the State Bank actually does not have the details it needs to be able to say that CPEC will be an engine of growth in the years to come. Simply building a road network and a set of power plants, as well as a new port may or may not lead to a revival of growth in the country. It could be a momentary source of demand for the construction sector, and banks may find some slight uptick in demand for investible resources, but whether the infrastructure envisioned in the projects lays the underlying groundwork for a ‘game-changing’ type of transformative impact on the economy is too large a claim to make from the available information.
A breath of fresh air has wafted through the economic dialogue this week. Now we wait to see how the finance minister and his team react to these words. Will they seek to silence their colleagues and swat away the pesky commentary that is sure to be built upon their words? Or will they engage with the substance of what has been said and rise to the expectations laid out in them? Much will be revealed in the choice they make.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, December 10th, 2015
