Widening disconnects

Published November 27, 2015
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Official statistics and narratives have a reputation that is not entirely undeserved or unjustified. The narratives are generally constructed with a certain condescension that the audience will buy whatever is told to them, or that they lack the knowledge and expertise to comprehend and challenge whatever is put out, no matter how flimsy and feeble the argument.

Pakistan’s economic managers over the past three decades have managed to fudge, manipulate, cheat, obfuscate and cook up half-truths with a regularity that has now become predictable. However, since the ‘awam-dost’ era began in 2008, the atrophy of the nation’s statistical data has entered a new phase where the data expanse in the public domain is being narrowed. Poverty numbers not looking good (or good enough)? Drop the series. Income inequality posing a problem? Simple — stop generating it. FBR holding on to billions in refunds? Don’t report it. And so on.

In the absence of credible data, official narratives assume a greater ‘truthfulness’ and currency, since they become harder to challenge.

Government claims on the economy do not hold up to scrutiny.

To get a truer sense of how the economy is faring, it is important to deconstruct the official narrative with regards to economic performance. The narrative constructed by the finance minister is as follows: Pakistan has been saved from the brink of default; the government has undertaken ‘tough reforms’; the economy has stabilised, with foreign exchange reserves at historic high, and inflation at historic low, levels; the growth ‘momentum’ is returning; and, international agencies and global investors have taken note of this government’s economic performance.

Examining each of the pillars of this narrative individually will give a clearer idea as to how credible it is.

Foreign ‘investors’ have reposed confidence: The finance minister is, wittingly or unwittingly, confusing foreign investors who bring in capital, technology and expertise into a country to produce goods or services, with bond ‘investors’ who buy a country’s sovereign or corporate bonds in the financial markets for a guaranteed return. The first group provides foreign direct investment that creates jobs, pays taxes and generates exports, while the second group lends money to the government on the promise of a healthy, and guaranteed, return.

Almost the entire ‘endorsement’ of the government’s actions on the economic front has come from bankers and financial market participants. On the other hand, foreign direct investment into the country has declined in the past two years from already low levels. For 2014-15, net FDI amounted to $851 million, down from $1.7 billion the year before. For the first four months of the current fiscal year, net FDI inflows are a further 24pc lower.

Arguably more importantly, domestic private investment is failing to pick up. Private investment has fallen to multi-decade lows, falling to 9.7pc of GDP in 2014-15. Bank credit utilisation continues to remain low, indicating that investment prospects so far remain depressed, despite government expectations.

Tough reforms have been undertaken: Pakistan has managed to navigate through more reviews in a Fund programme than ever before. However, this does not mean it has undertaken more fundamental and meaningful reform than ever before — a telling indictment of programme conditionality and design. The most glaring disconnect in the Fund programme is between genuine, fundamental tax reform that IMF should be demanding, and the quarterly performance criterion of revenue collection against which Pakistan’s ‘success’ is measured.

The first objective would aim to increase the tax base, introduce equity and fairness in the tax system, clean up tax administration, and lower the burden on the less-affluent by increasing progressivity in the taxation structure. The second objective, which is programme conditionality, reinforces the corrupt and decrepit status quo by empowering an unreformed FBR to go after existing taxpayers.

Not surprisingly, in touting the ‘success’ in tax collection under his stewardship, the finance minister relies on nominal percentage growth in revenues in the past two years. Tax revenues are, broadly, a function of economic growth, inflation, increase in the tax base, and changes in tax rates. Thus, with minimal enforcement effort, GDP growth, inflation and an increase in tax rates can deliver a percentage increase in revenue. A better way to measure whether an increase in tax revenue is a result of a serious reform effort is to look at the increase in new taxpayers and their contribution, and to reference tax collection to GDP.

On both these measures, the revenue effort is less than inspiring.

Economic growth is returning: The headline ‘fact’ that economic growth has picked up from a meagre 3.7pc to a modest 4.2pc in the past two years is neither here nor there. A large part of the supposed growth has come from the services sector ‘black box’ which is difficult to measure due to a greater share of informality, and not from industry or agriculture where the growth calculation is comparatively more transparent.

Industrial growth in 2014-15 came in at a provisional 3.6pc, but large-scale manufacturing (LSM) recorded growth of only 2.4pc. For the first three months of this fiscal, LSM growth has picked up to 3.9pc — with virtually all of the growth coming from just three sectors.

These are just a few important examples of the government economic story not holding up to greater scrutiny. Similarly, the finance minister’s constructed narrative on the level of foreign exchange reserves accumulated, or the low level of inflation glosses over important caveats.

Since the IMF has consistently endorsed the government’s narrative, with few meaningful or material caveats, it too bears a heavy responsibility for potential misrepresentation of the economic condition of a borrowing country. Without a truthful picture of the economic situation, voters in a democracy, as well as investors, are not able to judge the effectiveness or otherwise of government policy.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, November 27th, 2015


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