THIS government is having an increasingly difficult time producing meaningful outcomes in areas that really matter. The thing about having an objective like revenue collection, for example, as a benchmark against which progress will be measured is that progress or failure cannot be spun. Either the revenues are coming or they are not. That’s the thing with the economy; its rewards and penalties are hard and fast, and cannot be talked into and out of existence.
The recently released third quarterly report of the State Bank gives us some food for thought when considering this. Since coming to power, the PTI government has careened from one economic message to another, until it finally found its footing by signing the IMF programme. Along the way, the finance team saw complete turnover, from minister to secretary to FBR chairman and State Bank governor.
Just before this agreement, the government was taking the line that they have put in place some measures to stimulate investment through the mini budget of January 2019, and encourage exports, through depreciation, subsidised lending, and most importantly, a large subsidy on gas pricing. The message continued that due to these steps, the economy was now recovering, and evidence of this was the modest growth seen in an indicator known as private sector credit (PSC) offtake.
But then came a State Bank report saying that the rising PSC is largely due to a hike in prices and depreciation, as companies are forced to borrow more in order to manage the large-cost escalations they were seeing. I wrote about this at the time, and the finance ministry reacted angrily, even writing a letter to this newspaper saying that I was making a “bizarre argument that defies conventional economic wisdom”.
Economic outcomes, especially as reflected in key indicators, should not be celebrated or thrown in each other’s face.
“Any student of Economics 101 can enlighten the author that a rise in private-sector credit is seen as a leading indicator of greater economic activity and growing business confidence,” their letter stated. And it went on. “Business confidence is growing,” it claimed, “and is reflected in recent market developments.”
What were those “market developments”? That foreign investors were net buyers in the stock market, that “the largest private-sector IPO in Pakistan’s history” has just been completed, that bond investors have started buying longer-tenor PIBs, and lastly that the “currency markets have stabilised” as spreads between interbank and open markets had narrowed to one per cent. “A reduction in spread is another indicator of growing market confidence.”
This was back in March. Sadly, these takes on the economy, advanced by the finance ministry in writing, have not aged well. Today, the State Bank has once again said what it was saying back then, that the PSC was elevated earlier because “the increase in PSC was largely driven by higher input prices, which in turn increased the working capital needs of the businesses”.
And to top it off, the PSC is now decelerating, so even if we use it as “a leading indicator of greater economic activity”, in the words of the finance ministry, (which it cannot be if it is rising due to “higher input costs” of firms), it would imply that the moment of revival of business confidence that the finance ministry sought to celebrate back in March had fizzled out by July. Today, the PSC is falling in a rising cost environment, which indicates that business activity is slowing down sharply. Since July 1, several sectors have seen shutdowns and announced deceleration in output.
If the currency markets had stabilised back in March, how do we explain the devaluations that came subsequently? If stock market performance was a sign of renewed business confidence, what do we say today, when the market has fallen to near 2015 levels? If participation in long-term paper is a sign of “renewed business confidence”, what do we make of the inversion in the yield curve that came in the May auctions?
As of writing this, the government has lifted Rs2.3 trillion in short-term Treasury bills, at cut-off yields of 13.75pc, 13.95pc and 14.1pc in three-month, six-month and one-year paper respectively. These are stupendous yields, up by more than 2pc since March in three-month paper. This is what it has taken to activate the government debt markets that had lain dormant for more than a year. This is the highest participation in a long time, and the banks’ long wait for rates to come up to their liking has paid off.
More recently, some eager sections of the PTI have tried to pull similar rhetorical claims of triumph around the contracting current account deficit data. Last week’s data showed the CAD had contracted by 30pc, and this was hailed by some as a big policy success. But once again, a closer look shows that while this may well be welcome news, it is due more to fortuitous factors than anything else.
Here is what the State Bank says: “The sizable decline in machinery imports following the conclusion of early phase of CPEC, lower quantum energy imports (excluding LNG) amid lower power generation in Q2 and Q3, and a temporary softening in global oil prices, all contributed significantly to improvement in the CAD by lowering of import payments.”
Translation: the current account deficit decline has very little to do with the government’s policies.
Economic outcomes, especially as reflected in key indicators, should not be celebrated or thrown in each other’s face. They rarely tell a story by themselves. Indicators and data need to be looked at in the right context before they tell their story. Going forward, the government will have to produce real results, not rhetorical ones. And the ability to focus, to pull their team together around the pursuit of a shared goal, to persuade others of the merits of their chosen course of action, will all be tested to the hilt. This is called leadership, and it is high time Mr Imran Khan showed us he knows what he’s doing.
The writer is a member of staff.
Published in Dawn, July 18th, 2019