Spearhead Analysis – 25.03.2014
The recent sudden seven per cent appreciation of the rupee against the dollar has triggered a debate on the viability and sustainability of this trend. The debate is between the economists and there are some heavy weights there — and the accountants. The issue being debated is a serious one — whether 2014 will be a year that begins the revival of Pakistan or is the country going to plunge into a deeper hole than the one it is already in? The debate is against the backdrop of a serious internal security situation with no certainty of stabilization and serious shortfalls in the energy needed to support a resurgent economy.
While announcing a reduction of almost Rs 800 billion in the foreign debt the Finance Minister gave some more glad tidings. He said that $ 400 million was expected under Coalition Support Fund payments in April and a whopping $ 1.6 billion over the next four quarters. He announced the formation of a Pakistan Development Fund (PDF) for development projects and predicted that it would grow to $20 billion over the next four years. A mysterious $1.5 billion grant has already come into the PDF probably from Saudi Arabia leading to speculation about what Pakistan has to do in return. The Prime Minister and the National Security Adviser have categorically ruled out any dispatch of troops and since then the focus has shifted to weapon sales. The IMF has said good things too — like a growth rate of over 3.3% from the present 2.8 figure and has released the next tranche of the $6.7 billion package negotiated last year. The Finance Minister is looking at 4.5% this year and eventually 6% GDP growth and a 13% tax to GDP ratio with the fiscal deficit moving from 8.6 to 6 this year to 5 next year and 4 the year after that. Remittances are up at $10.24 billion from 9.23 — an 11% increase. It is true that the KSE index hit 27000. Foreign exchange reserves are $9.52 billion (commercial and central bank) and predicted to be 10 billion soon and 20 billion in 3 years. Exports are stated to have grown by 6.6% and agricultural credits have gone from Rs 336 billion to 380 billion and large scale manufacturing has grown by 13.2 %. Inflation linked to CPI has been reduced to 8.6% and likely to be maintained at 8.5%. Tax collection is also up. Inflows are expected from the Eurobond launch and the sale of 3/4G. The GSP+ concession is also helping. Giving credence to these future trends is the rumor that $ 3.5 billion more are expected to boost the PDF and more inputs are expected from the sale of 3G/4G licenses, from privatization, from Eurobond sales, increased remittances and the export of three very successful indigenous weapon systems — the Al Khalid Tank, the JF 17 Thunder aircraft and the ANZA surface to air man portable missile — all co-produced with China. Of these the Stinger type Anza can be a game changer and its sale will have to be carefully considered. Massive infrastructure projects have been announced — a metro bus system for Rawalpindi-Islamabad and a Lahore-Karachi motorway. China is expected to contribute enormously in the energy sector, the up gradation of the railways freight system and the nuclear power generation plants in Karachi. These are all big ticket items.
The economists have questioned the viability of a PDF and more grants/gifts coming into Pakistan. They play down the saving in debts payback and they see a nexus between the Government, the State Bank and the IMF in supporting what they term as ‘selective statistics’ trotted out by the government. They cite rising prices, rising unemployment and youth leaving the country in droves. Serious doubt is cast on the ability and capacity of the Federal Bureau of Statistics to predict anything much less a complex figure like the growth rate. The fall in the rate of inflation is questioned as are the figures giving domestic and foreign exchange assets. According to them the budget deficit is being manipulated by the government in connivance with the State Bank. They say that dollars were flooded into the street to bring down the exchange rate and that this cannot be sustained. In short they question every statistic that the government has given. The bottom line for them is that in the absence of structural reforms, higher revenues, a better tax to GDP ratio, cuts in wasteful expenditure, lowering of the trade deficit, increased domestic savings, higher remittances and investment the economy cannot register any sustainable revival. For them the uncertainty in the future of the internal security situation and the energy shortfalls are very serious considerations.
What is the man in the street expected to believe when he is being bombarded with two diametrically opposing views? The reality is that the Finance Minister has delivered on his promise to bring down the exchange rate. He has predicted a steady inflow of dollars and explained these and the concept of the PDF in clear terms. The government is tackling the root of instability –the insurgency in the western border areas– and the provincial governments are trying to control urban violence. The first ever National Internal Security Policy has been announced and is being analyzed. The Prime Minister has articulated a vision for the future — good bilateral relations, non-interference in other countries, economic growth, infrastructure development and reducing energy shortfalls. The military is supportive of the government and stands as a bulwark against any catastrophic events that threaten the country — it gave a small preview of its precision targeting capacity before the TTP asked for talks. The US Secretary of State while addressing a joint press briefing with Prime Minister Nawaz Sharif has categorically stated his confidence in Pakistan’s nuclear security measures that have been developed since Pakistan’s program became overt after the 1998 tests. The Prime Minister’s speech at the Nuclear Security Summit in Brussels was a clear statement of Pakistan’s position and resolve. This is all positive augers well for the future.
Yet even the most ardent optimist cannot ignore the pitfalls that the economists are pointing out and it would be prudent to address the points that are being raised. The bottom line is that you can either wait for all kind of reforms to be implemented or just go ahead and fix what you can with whatever you can muster and work on the reform agenda at the same time. Considering the nexus between the economy and the security situation any change in one will influence the other. Pakistan is set to rise and the economy will improve over the next two years. The statistics will continue to get better. The dollar will hover around Rupees 100. Democracy is in place and working. The cloudy narrative is clearing up even in the face of regional uncertainty. The internal security situation is critically important especially with Afghanistan bent on blaming Pakistan for its security lapses as in the case of the recent hotel bombing, and the outcome of the talks with the TTP remains uncertain. The rumors of Pakistan’s strategic tilt in the Middle East situation and support for a Saudi backed candidate in Afghanistan need to be addressed. Iran is most important for Pakistan. The need is for the political leadership at all levels to back up its ability with solid capacity that will come from teams of credible experts. The newly minted Cabinet Committee on National Security (CCNS) needs to be activated full time for policy debates and the hierarchical status of NACTA( National Counter Terrorism Authority) carefully considered.
(Spearhead Analyses are collaborative efforts and not attributable to a single individual)