The Empty Full Glass

Spearhead Analysis – 12.04.2019

In a recent article the author, a well -known journalist, after listing the failures and shortcomings of the PTI government, concluded with this comment about a minister— ‘(he is) part of the crazy crew in the la-la land that the PTI operates in’. This is best explained by this excerpt from the article— Nothing quite puts into perspective the la-la land in which the government operates than the latest claim by the finance minister that the economy is out of “intensive care” and on the path to recovery. “The crisis is over,”  Asad Umar declared  before his departure for Washington for the final round of talks with the IMF for a bailout package—- this wildly optimistic declaration came as inflation approached double digits, the rupee plunged to a record low against the dollar, and the stock market appeared in a state of free fall. Revenue collection has shown a record shortfall of more than Rs.300 billion in the last nine months. And the economic growth rate is likely to decelerate to 3.4 per cent this financial year, and further down to 2.7 per cent next year, according to a World Bank report”.

The Adviser to the PM on Commerce had reportedly said that the country was ‘kangaal’ (bankrupt) and that the 10 per cent extra duty on bigger cars and SUVs would be withdrawn. The Finance Minister had also promised that from July onwards non-filers would be able to buy real estate and cars. The World Bank and other reports say that the debt to GDP ratio is 72 per cent and climbing, the rupee is down 35 per cent, CPI in March was 9.4 per cent, the stock exchange is down 31 per cent and growth over the next five years will average 2.7 per cent. Economic activity including real estate is at a standstill. So do pardon the man in the street for being confused and worried. If, as someone said that market operates on 95 per cent perceptions and 5 per cent facts then a real hatchet job is being done on perceptions.

Here is another view. Extract from a fund managers’ report—- ‘After experiencing large Current Account Deficits (CAD) and fast depleting foreign exchange reserves over the last couple of years, the situation finally appears to be improving. Intractable imports that had become unsustainable have started responding to demand compression policy measures such as hefty PKR devaluation, hike in interest rates, levying/expanding import duties, and deep cuts in public spending. Exports have so far not picked up pace but we expect them to show meaningful growth from next year onwards as exporters ramp up their capacities and reestablish relationships with clients. The government also remains focused on boosting exports and incentives have been parceled out such as exemption from gas and electricity tariff hikes. The CAD for February 2019 has clocked in at USD 356 million as compared to USD 1.6 billion per month, on average witnessed in FY2018. Negotiations for a bailout package with the IMF are underway and agreement is expected to be signed in May. The government is working with the IMF to devise short to medium term framework for slashing the budget deficit through increasing revenues, rationalizing expenditure, raising utilities tariff, reducing circular debt, making exchange rate more flexible, and monetary tightening to contain underlying inflationary pressures. Entry into the IMF program would ameliorate the credibility of Pakistan in the eyes of global financial community, paving the way for fetching flows from multilateral agencies such as the World Bank and Asian Development Bank, and also facilitate access to international capital markets. Inflows from friendly countries have materialized, which have helped SBP forex reserves increase to USD 10.7 billion in Mar-19 from the recent low of USD 7.2 billion seen in Dec-18. Though financial assistance from friendly countries has staved off the immediate crisis situation; the urgency for structural reforms and measures to further narrow the CAD should remain the policy priority given large funding gap in the coming years. Monthly inflation as of March-19 has risen to 9.4% YoY and we project it to further rise as government still has to raise utility tariffs (electricity & gas) in the coming months to reduce the subsidy burden, while petroleum products prices may also be augmented to generate additional revenues via GST, and pass-through of expected currency devaluation during the coming months. However, average inflation for FY21 is projected to drop to 7% after peaking in 1HFY20. After a hefty 5% rise in interest rates during the ongoing monetary tightening cycle, the Discount Rate has risen to 11.25%. We expect a nominal 50 basis points increase in interest rates henceforth as real interest rates would still remain in positive territory on average even after accounting for upward trajectory of inflation and also because of the negative implication of high interest rates for the fiscal side— “.

Add to this the views expressed by two well-known financial and economic experts in a recent TV telecast. Both said that an environment had to be created for the wealth creation envisaged by the PM. There had to be freedom to carry out business, real estate and financial transactions without fear of the FBR, the NAB and threats from government functionaries. Both admitted that all activity was at a standstill because of the climate of fear and uncertainty. Both said that the undocumented economy was a reality and should be allowed to function because that was the only way to make it documented. One of them also blamed the media for its role in vitiating the environment by unnecessary coverage of the judicial process currently underway and for being biased in their coverage by making everyone with wealth a suspect. Both said the extractive and extortive strategy had been tried earlier and had failed. Now chaos and paralysis have stalled even the regular functioning of the administration; though the PM wants a revival of tourism, an inflow of FDI and a liberal visa policy has been announced.

Pakistan for the first time in decades is questioning old assumptions and charting new directions and it is using its recent history to generate policies that are in its national interest. No longer is it an option to ignore the steps that have to be taken to get us off the FATF grey list and to get our narrative accepted by the world through demonstrated performance.  On these issues there has to be a single political commitment with no dissensions and with all institutions on board. There is a paradigm shift and the Government has to ensure that it it for the National interest. The over-riding emphasis on blaming the past and a virtual witch-hunt against the corrupt is not going to achieve the objectives. The focus has to be on the economy and already valuable time has been squandered exploring non-viable options. It is time that the PTI-led government gets its act together to create an environment conducive for investment activity and growth. They need to infuse confidence in the system through a collaborative and cohesive policy narrative, with the focus firmly on the future. The IMF package should be finalized and we should move on with structured reforms to rebuild the economy.

(Spearhead Analyses are collaborative efforts and not attributable to an individual)

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