HERE we go again. Every time an economic indicator turns positive, this government and its fan club have a habit of reaching for the trophy and declaring victory. In its early months in power, as the economy slowed rapidly and massive adjustments in the exchange rate caused inflation to shoot up, then finance minister Asad Umar tried to tout some success by pointing to the improvement in private-sector credit off-take, arguing that rising credit disbursement to the private sector was a sign of economic dynamism returning to the economy.
This was in December 2018, while the talks with the IMF were stalled and news was in the air of Pakistan receiving a few billions in financing from our friends in the Gulf. Both these developments, the arrival of billions from ‘friendly countries’ and a short-term rise in private-sector credit disbursements were presented as victories by the government at the time, and as evidence that the period of pain and adjustment had proved to be short-lived and “green shoots” were sprouting in the economy. Things had turned the corner, they said and not too long after that Asad started talking of a “home-grown package” that he had developed and would be unveiling soon.
This was back in January of 2019 and the clock had already started to tick on the finance minister. Talk was swirling of a divided house and palace intrigues to replace him. The louder that talk became, the more we saw Asad on the back foot, doing his best to spin every indicator as a success, including rising inflation!
I wrote a piece about this in March of that year, in which I quoted the State Bank’s assessment of the economy in the period that the finance minister was talking about, which said the exact opposite of the spin. Private-sector credit was not rising because firms wanted to invest. It was rising because the cost of inputs had risen sharply, and firms were struggling to survive, the State Bank had reported, pointing out that the majority of this borrowing was for working capital needs, not investment.
That’s the thing with economic indicators: they can change. No single indicator tells the story of the economy.
So touchy were the times that the finance ministry went to the extent of sending a ‘clarification’, in which they claimed that “any student of economics 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”.
Fair enough, but the problem was that the same indicator turned negative a few months later, so my question then became “what does this say about the economy now?” Of course, there was no response, quite possibly because the finance ministry had seen massive turnover by this point, with the finance minister gone and a financial adviser in his place.
That’s the thing with economic indicators: they can change. No single indicator tells the story of the economy, and any time you see political figures touting one or another indicator to make the case that things are turning around or getting better, it is worth your while to ignore the spin.
I’ve been reminded of this whole episode since I saw the prime minister himself touting July’s remittances number and the current account deficit turning into a surplus. Here is what he said on Monday: “MashaAllah Pakistan’s economy is on the right track. After current account balance posted deficit of $613 mn in July 2019 & a deficit of $100 mn in June 2020, in July 2020 current account balance swung upwards to a surplus of $424 mn. This strong turnaround is a result of continuing recovery in exports, which rose 20% compared to June 2020, & record remittances.”
So here we go again. No, the economy is not “on the right track”, and no a current account surplus by itself is not necessarily good news, and no remittances have very little to do with government policy, unless you’re talking about the wrong sort of remittances altogether. Let me explain.
The current account deficit has fallen primarily because the economy has slowed. Second, oil prices have fallen and quantities imported have also declined due to a slowing economy. This is not necessarily a sign of health. And if they prime the engines of growth, as they are trying to with the construction package, this situation could easily reverse once growth returns.
They tout a rise in exports, but in reality exports have continued to fall over the last two years. What we really need to see is a comparison of the amounts of public resources they have pumped into the textile sector in the name of ‘incentives’ for exporters (such as gas price subsidies and credit subsidies) versus the quantum of benefit the country has derived from these ‘incentives’ in the form of rising foreign exchange earnings.
Remittances were up in July, no doubt, but let’s see how long they stay up there. If we see continuous elevated remittances for the next six months, and their composition is the same, in the sense we see them coming from the same countries and in similar packet sizes, then yes we could argue that some of the reasons given by the State Bank for the rise are correct. But what should we do if this peak does not hold?
What should we say if and when the current account deficit returns? And moreover, what is happening with the IMF programme and fiscal deficit reductions? In truth, there is no indication that the economy is “on the right track”. All there are for now are a few indicators that suggest a shallow, short-lived growth spurt is being engineered through the massive expenditure of public resources, with the sole aim of putting some wind in the government’s sails. In the days to come, we should expect to see them dancing around a different set of indicators every month.
The writer is a member of staff.
Published in Dawn, August 27th, 2020