Boom time blues

06 Aug 2020


The writer is a member of staff.
The writer is a member of staff.

THIS country has been through a repeated cycle of boom and bust that by now most of the playbook is well known to those who have followed these successive bursts with any care. Ultimately, they all look and feel the same, and most importantly, they all end in tears with appeals to the IMF for emergency bailouts.

Those of us who have seen more than one such cycle unfold know another part of this story: it is hard to call them for what they truly are while they are unfolding. The indicators that we are accustomed to using to show economic problems will seem to be improving, growth will rise, jobs will be created, opportunities will multiply, people will make money, some business associations might even laud the government of the day, ministers and party leaders will laud the numbers to show that they have fixed what was broken, and tell us that the good times are now here to stay.

It happens every time. Remember when Shaukat Aziz proudly announced “we have broken the begging bowl”, when his government refused to draw the last tranche from the IMF programme in 2004? His argument was that stability had been restored to the economy, reforms had unlocked its potential, and the nine per cent growth rate and “record high reserves” that had accumulated were now here to stay and Pakistan had finally cracked its addiction to foreign assistance.

Of course it didn’t last, just like the naysayers of the day were warning, and by 2008 Pakistan was back on the doorstep of the IMF as reserves had depleted to critical levels, large-scale capital flight was underway, growth had crashed and the country was staring down the barrel of a large macroeconomic adjustment of precisely the sort that marked the beginning of Musharraf’s rule (from 1999 to 2001).

The critical ingredient that was missing in the first two growth booms is similarly absent here: reform.

The second boom period began in 2014 and had crashed by 2018. Perhaps we can say the government was forced into pro-cyclical spending to shore up their political fortunes once their political crisis began and those boom years could have had another year (or maybe even two) of life in them had they been allowed to continue without political challenge. But the crash was coming. There is no denying that.

It is necessary to keep reminding people of this history of constant boom-bust cycles because it looks as if we are gearing up to repeat this story one more time, albeit in diminished form.

With all the incentives that have been thrown at property developers and the real-estate sector, the beginnings of a ‘construction boom’ might get going now. One critical indicator to watch in this context is cement offtakes, that have shown a sharp rise in the months of June and July in the north zone (KP and Punjab), which can point to the beginnings of large-scale construction activity getting started. This has been made possible by massive inducements offered to property developers since at least April, the largest of which is a tax amnesty scheme that allows undeclared cash to be transferred to real-estate investments without any questions asked. Along with this there is a slew of tax incentives and subsidised credit that is part of the overall package with the idea to kick-start the process of growth in the country.

Some might argue that this is necessary to emerge from the devastation of the lockdowns, but the fact is Imran Khan was talking about incentives for the construction sector as far back as November 2019, long before Covid-19, so it is an ingrained priority for the government that is only now beginning to be implemented.

Alongside these incentives, the sharp reduction in interest rates has given many businesses an unexpected boost. Coupled with some subsidised credit schemes being operated by the State Bank, industry people say they are finding reason to smile after a protracted winter. The net result will start showing in the data soon, with construction producing a knock-on effect in allied industries, exports (which have already rebounded to pre-Covid levels) rising further, and the ‘green shoots’ giving a boost to government revenues and helping manage the growing fiscal deficit as well.

The reason it is worth sounding a note of caution is that this government, perhaps more than any other, has the tendency to start declaring triumph with every turn in the data. The green shoots we are seeing now are surely a welcome sign after the darkness of the last two years since the macroeconomic adjustment began, but surely the resultant growth will be a smaller affair than the last two growth booms, unless this time too they can find a way to buttress the growth with massive infusions of money from outside (whether war on terror assistance in the case of Musharraf, or Chinese money in the case of Nawaz Sharif).

But the critical ingredient that was missing in the first two growth booms is similarly absent here: reform. If a growth boom is indeed shaping up, due to massive inducements from the state coupled with an amnesty scheme, it will happen in the absence of any underlying productivity increases, any broadening of the tax base or composition of exports, any power sector reform or any improvement in the savings environment.

This is precisely what has happened every time in the past when they induced a fake growth boom using massive government inducements, without anything else being changed. Admittedly, whatever might be shaping up today looks like it will be smaller than its predecessors, but the same lessons from the earlier era apply equally well. Short spurts of growth feel good while they happen, but in the absence of structural reform in the underlying economy, they always leave the economy depleted and the state on its knees. Let’s hope that history is not about to be repeated again.

The writer is a member of staff.


Published in Dawn, August 6th, 2020