ONE of the most enduring, and baffling, constants in Pakistani politics is how the seemingly 20/20 vision of politicians with regard to economic management while in opposition degenerates to myopic near-blindness when in government. The clarity with which they see through the shenanigans of the official narrative on economic performance and the perils of economic policies being pursued is somehow lobotomised as soon as they themselves enter the corridors of power — and start singing the same official tune. (This applies to many senior civil servants too. They parrot ‘all is well’ (‘sub acha hai’) while in government, and only regain clear vision upon retirement!).

The PTI government has disappointingly started to sing from the very same hymn sheet the party criticised as ‘false’ just over a year ago. The following are some of the most common, and durable, official narratives the government should be wary of, rather than adopting wholesale.

The first is mistaking post-crisis stabilisation for a durable economic turnaround. Given the nature, design and tenure of IMF-led programmes, they typically treat the secondary infection rather than cure the underlying disease of the patient. Pakistan’s previous IMF programme running from 2013-16 abundantly reflects this home truth. Characterised as a resounding ‘success’ by the PML-N government, it received a ringing endorsement from the IMF itself. Yet, it proved a fleeting interlude between two Fund programmes for the country, which tipped into a predictable balance-of-payments crisis less than two years after the end of the IMF programme.

A related pitfall is mistaking ‘entry level’ reforms for the deeper structural and institutional restructuring required. A case in point is the recent jubilation over the jump in Pakistan’s ranking in the World Bank’s Ease of Doing Business indicator. Another is presenting the sharp spike in registered (‘active’) taxpayers as a fruit of tax reform when it was entirely due to a change in the definition and treatment of inactive taxpayers already on the tax rolls.

The government should avoid singing from a flawed hymn sheet.

Perhaps the biggest single source of blindsiding any government on the state of the economy and its own economic performance is none other than the narrative of IFIs. The ringing endorsement from the IMF in 2013-16 referred to here was echoed by the World Bank. Eventually, since the global capital markets follow the lead of these two multilaterals, international rating agencies as well as investors picked up this refrain. The PML-N government used the narrative of IFIs as validation of its flawed economic policies and to deflect domestic criticism.

For self-serving reasons, the staff and management of IFIs provide a less-than-completely honest characterisation of a programme country’s economic performance and the risks. For one, there is an inherent incentive for recording ‘success’ under a programme, especially one the US supports, even when the successes are modest, marginal or fleeting. Another motivation for the IMF is a clear case of agency conflict: the IMF wants to attract or ‘bail in’ private capital to ensure its loan amount is secure and repayment guaranteed. Hence, a strong bias exists in IMF communication towards overplaying the achievement of programme milestones and underplaying the risks.

Another perennial ‘favourite’ official narrative is using stock market performance as a barometer for investor confidence. Under this government, this extends to the interest shown by ‘carry traders’ in Pakistan’s domestic government securities. However, the stock market in our case is more representative of a small clique of broker-investors than reflective of the wider economy. In addition, a strong recovery in the stock market invariably follows external account stabilisation, but does not necessarily portend longer-term structural improvements. Hence, the government should use private investment/FDI as a truer measure of investor sentiment in the wider economy. Whereas the stock market recovery follows stabilisation almost immediately, a turnaround in private investment takes much longer, Hence, the preference of governments to use the more immediate, but flawed, measure.

The bottom line is that honesty, humility as well as empathy serve any government well. For one that is bravely trying to respond on a platform of change to a challenging economic situation left behind by its predecessor administration, it will serve it even more.

Tailpiece: The State Bank has issued a clarification regarding the inflow of ‘hot money’ into government securities, ostensibly in response to my article of Dec 6 in this newspaper on the topic (Chasing hot money). It makes two assertions that are questionable. First, it states that foreign portfolio investment into Pakistan is not new, with foreigners buying and selling local equities since the 1990s without causing any significant disruption. It implies that debt investors are no different. Anyone familiar with capital markets will disagree, knowing full well that the risk appetite and profiles of investors in the two asset classes are completely different. Equity investments are generally more stable and longer term, while debt market investment can be short to long term. Some foreign fund managers have been invested in Pakistani equities since the 1990s, hence cannot be compared to ‘carry traders’ who operate with much shorter horizons as they search for yields.

Having said that, anyone familiar with Pakistan’s recent economic history will also know that even foreign equity investors had pulled the plug in 2008, and between $1 billion to $2bn was headed for the exit — and was prevented from doing so only by the virtual closure of the KSE. This amount of selling and repatriation would have wiped out Pakistan’s foreign exchange reserves at the time.

The second assertion by the bank related to this last point. Its statement says that the hot money book currently is only less than 0.5 per cent of GDP. However, the $1.2bn book already represents 13pc of the State Bank’s gross foreign exchange holding, which is not insignificant.

While for now, any mass pullout of foreign investors from the onshore debt market is a tail risk, it is a somewhat ‘fat’ tail risk given the economy’s overall fragility. It is reassuring that the central bank states it is mindful of the risks. It needs to be.

The writer is a former member of the prime minister’s economic advisory council, and heads a macro-economic consultancy based in Islamabad.

Published in Dawn, December 20th, 2019