Time to end the spin

Published October 22, 2020
The writer is a member of staff.
The writer is a member of staff.

THERE is this pesky thing about reality — it always finds a way to assert itself. You can muzzle it, deny it and spin it away but it will always catch up with you eventually. Perhaps that’s why we call it reality, because it doesn’t go away simply because somebody in a position of power or influence orders it to go away. And for any ruler there are two realities that simply cannot be muzzled, denied or spun away: economics and war.

Take one example of how reality is being spun to try and put a little shine on things. On Wednesday, when the rest of the country was still debating the fallout of the Karachi jalsa, the prime minister tweeted the following: “Great news for Pakistan. We are headed in right direction finally. Current Account was in surplus of $73 mn during Sept, bringing surplus for 1st qtr to $792 mn compared to deficit of $1,492 mn during same time last yr. Exports grew 29pc & remittances grew 9pc over previous month.”

Read: Pakistan sees record 1Q current account surplus

This is spin, pure and simple, and there is an easy way to show that. Look at how the data is presented. For the current account balance (which is in surplus) the data is compared to the same period last year. For exports and remittances — the two key elements in the current account — the data is compared to the preceding months. The impression this creates is one of overall improvement.

But let’s invert this presentation for a moment and see what happens. Let’s compare the current account balance to the preceding months and remittances and exports to the same period last year instead and see what happens.

Notice how the shine goes off the numbers if you invert the manner in which they are presented.

In July, August and September, the three months under discussion, the current account balance was in surplus by $508 million, $211m and $72m respectively. In case you missed the significance, on a month-to-month basis the surplus is actually shrinking, and rather rapidly. Let’s discuss why a little later.

Next up, if you compare exports and remittances in the month of September from the same month last year, you will notice that exports rose this year by $72m, or 3.8 per cent of their value last year. This is not exactly a triumphant increase. Remittances in the month of September saw an increase of $544m from last year, or just above 31pc.

The thing to note in the data is the $417m increase in the trade deficit in September, which is almost 29pc, or just about the same as the increase in remittances. It is not clear whether or not this increase in remittances owes itself to any government policy yet, so let’s wait before celebrating it as a major triumph of any sort, but we can note this simple reality: the remittances are financing the trade deficit.

Notice how the shine goes off the numbers if you invert the manner in which they are presented. The current account was helped along by a near collapse in imports during the months of the Covid-19 lockdowns, and now that those are receding, oil prices are regaining their earlier levels, the surplus that was posted in July and August is shrinking.

The bigger point is that nothing in the underlying economy has changed so if the government guns for growth at this point the current account deficit will reappear with a vengeance.

Anytime you see any government loudly celebrating individual data points, telling you to rejoice because reserves are up this week or the current account deficit is down, or whatever, you can be sure that they have no real story of success to tell and are leaping from one data release to the other as if they are stepping stones that actually lead somewhere. If you look at all the data points that they have invoked in the past and urged us to rejoice, you will realise that the story of the economy is not going anywhere as of right now.

I have said it in the past and it bears repeating: deficit reduction is not the key here. Of course deficits need to be reduced when an economy has depleted its foreign exchange reserves or blown all its fiscal buffers to the point where its debt levels have hit unsustainable heights. Where exactly that point lies is a subjective judgement though.

There are examples from our very own neighbourhood of countries that have persistently run deficits in their fiscal and current accounts for almost three decades now without depleting their reserves (or at least nowhere near as often as Pakistan has) and without blowing out their fiscal balance sheet. India and Bangladesh stand out as examples, as to a lesser extent Sri Lanka and Nepal too.

In Pakistan what matters is what we do after the deficits have been reduced. Every government in the past 30 years has begun its term in office by reducing the current account deficit, and in some cases, the scale of the reduction has been larger than what the current government is boasting. There is nothing unusual in this. It happens every time in the first year of an IMF programme. Perhaps the only unusual thing for this government is that it will have two first years of an IMF programme in two years, given they are about to negotiate a return to the programme and present a circular debt reduction plan as well as a tax plan for the ongoing fiscal year.

The reality is that this government is adrift. There is no vision at play, whether for tax reform or on state-owned enterprises. We are told something has been developed for the power sector, but the test of this plan will be their ability to arrest and reduce the circular debt without recourse to tariff hikes.

Reality is asserting itself now, in the data as well as the streets. Time to end the rhetoric.

The writer is a member of staff.


Twitter: @khurramhusain

Published in Dawn, October 22nd, 2020


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