Lower growth and higher inflation

March 26,2019

The debate on how the economy should be run began way, way before the election. As early as the middle of 2017, one aspect of the anti-Nawaz Sharif narrative that a number of quack economists had...

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The debate on how the economy should be run began way, way before the election. As early as the middle of 2017, one aspect of the anti-Nawaz Sharif narrative that a number of quack economists had successfully hustled to the establishment was the unsustainability of Pakistan’s debt.

The mantra of too much external debt is one of those easy to insert into the national discourse half-truths. It’s true enough to survive the scrutiny of airhead television anchors but has no real roots in any rigorous analysis of the economy.

Debt numbers, and especially external debt numbers, are always more accurately viewed through the lens of what they represent as a percentage of GDP. When the PML-N took office in 2013, the external debt-to-GDP ratio was 27 percent. It fell to 27.4 percent in June 2017. Perhaps the greatest indictment of the previous government was not its performance during its first four years, but what it left behind for the caretaker government. In June 2018, right before the election, the caretakers had to contend with an external debt-to-GDP ratio of 33.7 percent, Pakistan’s highest level since June 2010.

So how has the external borrowing of this new, patriotic, on-the-same-page-as-Pindi government impacted the external debt-to-GDP ratio? In December 2018, the State Bank reported that it had climbed further to 35.8 percent. Since then, new loans from China, Saudi Arabia and the UAE have all come online.

One measure of how bad the news is would be to consider what the good news is. Apparently, after wasting almost three full quarters, the government will finally enter into a substantial IMF programme that will offer something close to $12 billion, and extract, in return, a series of typical neoliberal monetarist policy measures that have failed in this country on almost two dozen previous occasions. Luckily for the IMF, every banker there gets paid in US dollars. Unluckily for Careem drivers in Hyderabad, nurses at private hospitals in Bahawalpur, farmers in Nowshera, and dry fruit vendors in Chaman, everyone here gets paid in rupees. It is hard to imagine a scenario in the fall of 2019 in which there is not significant inflation, in which provincial harmony has not been disrupted by very strong disagreements about the NFC award, in which the pressure of pensions on public-sector organisations exacts dramatic measures including straight up sales of assets, and in which the country’s external debt-to-GDP ratio does not begin to push upwards of 40 percent.

Would any of this make the PTI government worthy of being declared a failure, a short one year into its first ever opportunity to govern the country? This is a tricky question because just like it was unfair to ignore the growth of the economy whilst railing against Ishaq Dar’s borrow and burn policies, it will be unfair to judge this government on only the metric of external debt, or high inflation, or even low growth. All three are conditions that Pakistan can survive, indeed will survive. But this cost has to be able to deliver something important.

High debt, high inflation and low growth are not inevitable outcomes for Pakistan. With a sustained demographic dividend that will surpass the 2040s and vast regional economic trade potential, Pakistan should be a growth juggernaut.

So the big hit that Pakistan is taking right now, in terms of higher debt, lower growth and higher inflation is almost like a detour. So too is the more worrying austerity that the government has adopted, cutting development spending willy-nilly, across all social sectors. All of this represents a set of avoidable costs. Why was this path taken? What is the pay off?

There really can only be one answer to this question: a fully transformed and altered fiscal reality in Pakistan, in which the super-rich pay their fair share in taxes. The prime minister has repeated on several occasions that economic pain is coming. The payoff from this pain, he has also repeatedly stated, is a permanent solution to this country’s fiscal crisis. Sadly, the early signs, as we approach the home stretch before the budget for fiscal year 2019-2020 becomes a reality, are not good.

The FBR is back to old tricks, squeezing every accessible source of revenue instead of finding new ones. The IMF terms will almost invariably be rife with rhetoric about widening the tax net, but with actual, specific measures that essentially only deepen the knife wounds that are inflicted on existing taxpayers – including the poor and the vulnerable through the decidedly regressive GST and the oft-corrosive application of the withholding tax.

Meanwhile, there is a lot of saccharine discourse around the importance of job creation and big businesses. This is a seventy-year-old game that the business elite in this country has perfected. The subsidies and SRO raj under which so-called titans of industry have been able to protect their globally embarrassing but locally intimidating riches seems like it will survive.

When the cabinet positions were announced, it had three striking features. The first was that Jahangir Tareen, who was, is, and will remain, the chief operating officer of the PTI – was not a minister. This was no surprise given his legal troubles. The second was the massive overpopulation in the cabinet of men older than sixty. This was surprising, given how much emphasis the prime minister has laid on the youth. The third was the under population in the cabinet of what one might call PTI Ideological – the old guard of the PTI that are real and genuine believers in a very different version of the country that they are now supposedly running.

Tareen’s omission due to legal issues was among the most damaging for the party because he is literally the only person in the party that could have credibly married the two divergent strands of PTI circa 2019: the ideological firebrands that believe in reform with the pragmatic horse-traders and establishment-plants. Short of his presence in the cabinet, there is no one Imran Khan can trust to keep the peace. This has had a profound impact in three places. First, it has meant that the PM’s own team lacks the wow factor it may have had with a fully functional Tareen doing his thing. Second, a disheartened Tareen has allowed governance in Punjab to descend to a gong show. Third, it has pitted PTI versus PTI inside the cabinet, making coherent and quick economic decision-making nearly impossible.

Finance Minister Asad Umar has thus been left having to try to manage three very critical constituencies. He has had to try to establish a veneer of consistency with the ‘Imran Khan Economic Doctrine’ which is a moveable feast at the best of times. He has had to work to bring in busloads of dollar-denominated cash, which has been as much of a foreign policy and national security function, as an economic management one. Finally, he has had to try to be accommodative with Tareen’s approach to governance, including trying to survive attacks from within the Tareen camp.

All of this has meant that this government has spent too much time deciding on the IMF loan, and not enough time on agreeing on a model of fiscal normalisation and fiscal federalism. The budget debate will take place in the holy month of Ramazan this year. Traditional food price inflation may be combined with a debilitating heatwave and power breakdowns. This represents a trifecta of threats that the PTI is wholly unprepared for. The velvet-gloved treatment of this government has already begun to be replaced with a harsher lens. It can get a lot worse, very fast.

A lot of the preparation for the summer of 2019 should have happened in cabinet meetings from September 2018 onwards. Instead, the government is now hurtling towards a one-year anniversary that will end with lower growth, higher external debt, higher inflation and a fiscal regime that looks exactly like any other in Pakistan’s ugly fiscal past.

If the super-rich in Pakistan manage to escape the clutches of rational, coherent public policy (read: their fair share of taxes) this summer, the entire reforms agenda of the prime minister will be dead on arrival. One year into tabdeeli sarkar, this government will risk sounding as hollow and dishonest as all its predecessors.

The writer is an analyst and commentator.


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