THE State Bank is at risk of losing its moorings, and Pakistan stands to lose its only institutional voice of economic wisdom and common sense.
Today, the SBP’s own pronouncements are being written in Islamabad, in Q block to be precise, by the finance ministry. And clear proof of this is in the writing itself.
Consider two documents released almost simultaneously. The SBP annual report on the one hand, and the fiscal policy statement released by the finance ministry, both coming in end January.
Both sets of documents are written in an identical tone, advance an identical economic story and at times even use identical language to make their point.
The SBP report opens by noting a “modest improvement” in real GDP in the fiscal year ending June 2012, and goes on to say that “growth was more broad-based compared to FY11, as it was evenly distributed across agriculture, industry and the services sector ... [and] was primarily driven by private consumption.”
Now look at how the ministry’s document opens its story: “The growth was more broad-based as it was evenly distributed across agriculture, industry and the services sector. The growth was driven by private consumption.”
Moving on, both the bank’s report and the ministry’s fiscal policy statement speak of “spillovers from agriculture” as an important driver of growth.
The SBP version: “The positive spillovers from agriculture, coupled with strong remittances and income support schemes, boosted construction activities and household consumption — both of which helped the manufacturing sector. In terms of services, there was a sharp improvement in financial sector earnings….”
The ministry’s version: “…spillover from agriculture sector combined with strong remittances and income support schemes boosted construction activities and household consumption — which helped the manufacturing sector. There was sharp improvement in financial sector earnings.”
The similarity in language found in the two documents is striking. When I was a teacher in university, if we ever had two papers submitted by two separate individuals that contained identical language it would be grounds for disciplinary action. In more than one such case, the students in question received an F in the course. But what does one do when those in high office of state are caught indulging in the practice of collusive misconduct? At a minimum, it’s worth our while to ferret out the source. Only one individual has access to both documents prior to their publication, and that individual is the finance secretary, who sits on the board of the SBP which approves the annual report, and also presides over the publications of the finance ministry.
If Q block wants to vet SBP documents prior to publication, is it too much to ask that they at least not leave their fingerprints all the over final product?
In the SBP’s report the real story begins much further down, where the scissors of Q block could not reach. For instance, both reports note with a smile that despite adverse circumstances, growth did not abandon Pakistan in this critical time.
But the SBP report manages to add this beauty of caveat: “It is important to realise that over-dependence on consumption makes growth unsustainable, especially when the country’s investment rate has been falling.”
A growth rate that shows even a “moderate” increase in the midst of rising consumption and falling investment is hardly cause for celebration, and where the report opens with a couple of lines trying to put a positive spin on this, further down the misgivings do find their way into the narrative.
In fact misgivings are sprinkled throughout the story the annual report tries to tell. For instance, the bank is able to say rather clearly that “[b]esides the low investment rate, the increase in the budget deficit has also emerged as a key challenge to the macroeconomic stability of the country.”
By contrast, nowhere in the fiscal policy statement put out by the finance ministry is the budget deficit presented as a challenge to be confronted.
The consequence of a budget deficit in the range of 8.5 per cent of GDP is a growing domestic debt, which grew by 27 per cent last fiscal year. Expenditure on debt servicing crossed Rs1tr for the first time ever in fiscal year ended June 2012, about 40 per cent of total revenues.
A theme that had briefly found its way into State Bank pronouncements in the fall returns in the annual report: “SBP is concerned that banks are shifting away from their role as intermediaries between private savers and borrowers.”
This is important because it was precisely this argument that was used to justify the rate cuts of the fall. In its annual report, however, the bank says that weaning the banks off their preference for the price-indifferent and risk-free “dominant borrower” may be possible “with interest rates at current levels.”
On the external side, the annual notes that five consecutive years of contraction in the capital and financial accounts is where the real problem lies, “and not the size of the current account.”
Declining foreign investment and rising loan repayments are darkening the external outlook more than adverse trade movements, according to the bank’s assessment. A lengthy section on the exchange rate lays down a lot of words to explain that the depreciation of the rupee was the consequence of geo-political developments and “adverse market sentiments” rather than the cuts in the discount rate.
No mention is made of any difficulties in making continued loan repayments from the reserves, except a brief lament of the worsening import coverage ratio, to say only that this ratio “continues to fall in FY13.” Where is this continued fall in the coverage ratio taking us? Back to the IMF? The SBP does not say.
Dwindling reserves, plummeting investment, ballooning budget deficit: you have to read very closely to get the real story from the SBP this time round, unlike last year when the story leapt out of the pages. Vetting or no vetting, the report is a disappointment.
The writer is a Karachi-based journalist covering business and economic policy.