Re: An ode to Shaukat Aziz
http://nation.com.pk/daily/jan-2008/14/columns1.php
Miracle that was!
DR FAISAL BARI
The public does not have access to atta, gas, petrol, diesel, electricity and water, or they have to pay an arm and a leg to get these. Unemployment remains high, law and order has deteriorated to a point that killings and bombings seem an everyday occurrence now, and political uncertainty, especially after the assassination of Ms Bhutto, could not be higher. Growth rate is slowing down, and it is not just the critics who are saying that. World Bank, ADB, IMF and others, who have been all praise for government economic policies over the last few years, are also revising growth estimates downwards currently, and even the State Bank of Pakistan (SBP) has said that growth and inflation targets are unlikely to be met this year.
The government, in the form of ministry of finance, is still adamant that ‘all is well’. But the real issues run a lot deeper and what we are seeing right now is just the tip of the iceberg. Growth rate is slowing down, but this is not a result of just the recent political tensions and uncertainties, it is largely the result of slowdown in industries that were giving us reasonable growth till last year or so.
Banking has slowed down and is facing a problem of non-performing loans on the consumer side now, leasing has slowed down and consumer products industry, including automobiles, has slowed down considerably as well. Tight monetary policy will probably mean that the slow down will not be reversed soon. Industries that were supposed to be going through major investment and BMR activity, especially textiles, have not picked up still, and agricultural production has not been spectacular. So where is the growth going to come from?
But there are even larger issues facing us, and some of these are going to make the life of the incoming government very difficult. The government has been trying to keep the economy stable by postponing a lot of adjustments that should have been affected months ago. The higher cost of oil has not been passed on to the people, neither has the higher cost of electricity been passed on to the public.
What happens when these costs are passed on: the new government will look bad, and will democracy be blamed for things that this non-representative government is leaving behind? Similarly, SBP has been avoiding devaluations against the dollar, even though, effectively, against a basket of world currencies, rupee has been devaluing. But when the rupee-dollar rate is altered, we are again going to see the representative government being blamed.
Devaluation is bound to happen. The trade gap remains quite large and significant, and though aid/loan flows continue, and probably so will remittance flows, but the foreign investment flows might not be as large as last year. If that happens, there will be pressure on the rupee for devaluation. Even with the reserves of 12-15 billion dollars that we have, and even if we decide to drawdown some part of the reserves, the exchange rate will alter. Another pressure on the exchange rate will come from the differentials in inflation. Pakistani inflation rates are higher than those faced by most of the developed countries, including the US, right now. In the medium run exchange rate will need to adjust to allow for the higher price rises in Pakistan. So, a devaluation is likely to happen, the real question is just about the timing.
Around 2000 or so Paris Club and some other lenders had rescheduled a large chunk of Pakistan’s debts. And Pakistan was also given a grace period of five years or so in which it was allowed the grace of deferring payments of principal amounts. This grace period should be ending, for a lot of loans, in 2008.
If that is the case, and if we have to pay instalments on principal amounts to the tune of say $1 billion or so a year, this is going to place significant burden on the foreign account of the country, and it will imply further pressure on the exchange rate and our reserves. We have also been issuing foreign currency bonds in international markets (Euro bonds and Sukooqs and so on). The initial ones of these will be maturing soon and this will also imply payments of $500 million or so a year. The job of the minister of finance is not going to be an enviable one in the next government.
The government has also been borrowing quite heavily internally as well. Though the State Bank has warned the government about this a number of times, it has chosen not to do anything about it beyond warnings. If our fiscal deficit and domestic debt spirals, which it has to an extent, this is recipe for higher inflation in future periods. Again, this will be another gift of the current and past government to the future government.
So what happened to the economic miracle that Pervez Musharraf and Shaukat Aziz had supposedly engineered? The growth did occur, there were large inflows into Pakistan as well, investment did happen in certain sectors and some of these sectors did post large growth rates, and incomes of certain classes of people and in certain geographic belts did increase significantly. The question is really how could the miracle evaporate so quickly and in so drastic a manner?
There has been a lot of discussion of how the government, over the last eight odd years, has been presenting too rosy a picture of the economy. They have, allegedly, been doctoring data and even reporting selected and more favourable data items. So, the growth and income increase story might actually be an exaggerated one. When the new government comes in, and they have had time to check the numbers, only then will we know the true story here.
Irrespective of the above, it is a fact that the growth of the past eight odd years, based on foreign inflows, growth in some sectors like automobiles, allied light engineering, telecommunications, information technology, consumer durables, banking and leasing and some other sectors, was not an economy wide phenomena. And it did not happen in sectors that had significant linkages with the rest of the economy. Agriculture continues to contribute a quarter of our GDP and almost one half of all jobs in the economy. But there was no breakthrough of any kind in agriculture.
In fact, with water becoming a more binding constraint with every passing year, things have become even tighter for farmers. In addition, removal of subsidies from inputs, and confused policies regarding the role of government in output markets has further exacerbated problems. So, agriculture could not really benefit from the growth over the last few years, and this, in turn, implies that almost half of Pakistan’s population and most of the rural population did not benefit from the growth spurt.
Similarly, though there was some growth in service sector jobs (banking, telecommunications and information technology); most of the job growth took place in skilled labour market jobs. Most of Pakistani labour is unskilled. So, where the skilled labour markets tightened a lot and professionals reaped the benefits of rapidly increasing salaries in some sectors, most of the labourers of the country did not benefit. The growth that took place was also geographically limited as well.
Big cities and more urban areas of the Punjab, NWFP and Sindh were the main beneficiaries of the growth. Rural areas, interior of Sindh, south of Punjab, and Balochistan did not benefit a whole lot. And since the growing sectors did not have strong linkages to the economies in these regions, trickle down did not happen and sustainability could also not be attained.
As inflows become smaller, loans become due, inflationary pressures hit the fan while the political situation continues to remain murky; we can predict hard times for the economy and for the people. The incoming government will have to face the music and it will not be a pleasant period. Irrespective of the rhetoric of the last eight years, the last government has really bequeathed a house of cards to the incoming government and to the people of Pakistan.
They chose to ignore doing basic and fundamental reforms. Instead they chose to inflate the economy through borrowed money and borrowed glory. Sadly, it is the people of Pakistan who will have to, yet again, pay the price for the indiscretions of the last government.
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