LESS than a year into their growth spurt the government finds itself reckoning with powerful imbalances emerging in the economy. It was never going to be any different. Our own history teaches us that every growth spurt plays out the same: government guns growth, imbalances emerge, reserves deplete, growth crashes. Why should it be different this time?
If the story remains the same, the song that usually accompanies the story also remains the same. Historically, whenever governments have gunned growth they always tried to explain away the attendant imbalances with a story consisting of the same four elements. They argue that the imbalances are manageable, sometimes even going so far as to argue that they are healthy (as in machinery imports that will improve the economy’s productivity), that they are temporary, consisting of lumpy one-off payments, that they are offset by positive developments in other areas such as remittances or inflows under the financial account, and finally that they are due to factors beyond the government’s control such as rising oil prices.
Consider how it worked back in the 2000s, during the Musharraf regime. The current account ran a surplus in fiscal years 2003 and 2004 as GDP growth charged on. The government proclaimed success, boasted they had ‘broken the begging bowl’ and vowed more growth to come as they moved to implement their ‘second generation reforms’. But in FY05 the current account plunged into deficit in three out of four quarters, closing the year at negative $1.5 billion. Then came the first quarter of FY06, in which the deficit soared to $1.5bn again, reaching in three months the same level it had taken 12 months to reach the previous year.
“As long as the current account deficit is financed by non-debt-creating flows, such as the foreign direct investment, we have nothing to worry about” then State Bank governor Ishrat Husain told Reuters in an interview as alarm bells began to sound. The country was drawing down its reserves, he said, that had hit historic highs too around then, and coupled with growing inflows from FDI, he felt comfortable that he “should be able to take care of the current account deficit”.
“Because of the oil price increase and the import pressure on machinery, it is very legitimate to draw down your reserves. And that’s what we are doing,” he said. “So, this is a manageable situation.”
Except it wasn’t. The current account deficit powered on quarter after quarter to touch $5bn by the time the year ended, driven by a trade deficit that nearly doubled that year. And as the government continued to pump growth, through relaxed monetary and fiscal policies, fuelled by the 9/11 bonanza as well as borrowing, it nearly touched $7bn the next year, before coming close to $14bn the year after that. This was FY08, when the current account deficit touched 9.2 per cent of GDP, the highest level it has ever reached in our history. The 2018 deficit was larger in dollar terms, but as a percentage of GDP it was closer to 6pc (data from World Bank).
The imbalances have already appeared, faster than anyone thought they would.
Through these months, as growth powered on and the deficit ballooned in tandem, the government’s story was built out of the four elements mentioned above. At a road show in London in March 2006 where the government gathered a group of industry leaders to try and sell Pakistan as an investment destination, for example, finance adviser Salman Shah was asked about the current account deficit. He told them not to worry. “Pakistan’s all-time high trade deficit was mainly due to higher oil prices and machinery imports” a report from the time quotes him telling the participants. “This would be met in 2005-06 through $1.645bn of privatisation proceeds, $583 million of grants, $1.5bn capital market earnings, $3.15bn aid and $1.9bn of foreign direct investment” and so on. That same month the government upgraded its projection for the trade deficit for the fiscal year, from $4.2bn to $6.6bn. In reality, it came in at $8.4bn.
These lines were echoed by the corps of the government’s cheerleaders in the media and brokerage houses in those days, many of them working as anchors in one of the TV channels. Presenting technical analyses that left one impressed with their fluent use of the language of economic policy, they hailed the growth rates, the investment, the bullish rise of the stock market and downplayed the growing deficits as manageable, temporary, healthy, beyond the government’s control, covered by inflows from other sources and so on. But economic reality is harsh. It is impervious to human wishes.
This history is worth recalling because we lived through it one more time from 2015 till 2018, although there were not many cheerleaders for that growth at the time, perhaps due to the PML-N’s frayed relations with the military. And today we are living through it once again, this time complete with the accompaniment of the cheerleaders.
The imbalances have already appeared, faster than anyone thought they would. The trade numbers for July and August have risen so fast they have taken everyone by surprise. But they were rising from January onwards, sending the currency plummeting by 10pc since May. The much-vaunted current account surplus has fallen back into deficit, and reserves are increasingly being shored up with foreign borrowing. One difference between then and now is that the previous two growth spurts came after the country left an IMF programme. The situation today is slightly different. They didn’t leave the programme, but were relieved from its requirements for one year, due to Covid. Now that year has ended, and they have to come up with a stabilisation plan at the same time as pumping growth, even as the songs of deficits past are playing in the background.
The writer is a business and economy journalist.
Published in Dawn, September 9th, 2021