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Opinion

February 7, 2015

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Lies, damned lies, and statistics

The PML-N government has set a new record in manipulation of economic statistics and hoodwinking the public that it has been pursuing prudent economic management policies. In the process, it has severely damaged its own credibility.
More shockingly, the IMF became a willing partner in this crime in order to recover its own past debt by giving a false certificate of good health so that the government could borrow from other foreign sources to make repayments to it in a timely manner. It applied no known yardstick of foreign debt sustainability in pushing the government to borrow more from abroad and is moving the country towards an external debt trap.
The IMF has also constantly endorsed heavy government domestic bank borrowing to finance the budget deficit at the cost of the private sector that stands crowded out. At the same time, the unmanageable domestic debt servicing liabilities that have become the single largest budgetary expenditure item do not appear to bother either of them. The proof is that the required structural fiscal reforms to generate revenue commensurate with rising domestic debt serving liabilities do not appear on the radar of the government or the IMF.
The IMF had set meaningless quantitative targets in designing and approving the EFF programme on September 4, 2013, and has since shown great ‘flexibility’ in monitoring them to help the government keep the programme operational and raise foreign exchange resources to repay its debt. As the government failed to meet even those meaningless targets, the IMF came to its rescue in each of the last five reviews of the programme. The first review was completed by giving one waiver, and the second, third, and fourth/fifth combined by giving two waivers each time. Moreover, the performance criteria that were declared to have been met were mostly based on fake statistics blindly accepted by the IMF.
The sixth staff level review was ‘successfully concluded’ two days back on February

5 in the same manner. The finance minister claimed to have convinced the IMF to grant more waivers and even “allow Rs150 billion for implementation of the National Action Plan as well as repatriation of internally displaced persons” with no tax measures. The IMF is silent on both these subjects but if the statement attributed to the finance minister is true, the IMF will set a record of its own for deviation from its charter, which was designed to provide temporary balance of payments support for genuine policy reforms to restore fundamental equilibrium in the balance of payments.
The simultaneously issued IMF press release asserts that “economic activity and external position continue to improve, driven by prudent fiscal and monetary policies”. Perhaps the IMF equates ‘economic activities’ with growth in GDP and ‘external position’ with the level of foreign exchange reserves only. We are unable to make even a wild guess about the IMF definition of ‘prudent fiscal and monetary policies’.
Regardless, the growth rate for FY14 has been inflated by manipulation of production data of the manufacturing sector and the minister has stated that the growth rate will go up further in FY15. But he and the IMF should know that the actual/projected growth rate is a function of private sector investment and public sector development expenditure – and both have been declining.
The IMF praises the improvement in the ‘external position’ by glossing over the deterioration in the trade, services, income and current accounts of the balance of payments. A modest increase in reserves took place due to massive foreign borrowing in the context of deteriorating current account. It cannot be labelled an improvement in the ‘external position’.
The real indicators of improvement in the ‘external position’ are trade, service, income and current accounts that show deterioration. To the surprise of professional economists, the IMF also showed no concern in its press release about the appreciation of the real effective exchange rate in a period of falling exports and widening trade deficit. That happens when expediency overwhelms professionalism.
The fiscal performance has been described as “generally good” without mentioning that lower budget deficit basically reflects a cut in development expenditure, delay in payments of tax refunds, buildup of circular debt and unfunded losses of the public sector enterprises, larger transfer of SBP profits reflecting excessive government borrowing, and less than full pass through to the consumer of the fall in world oil prices. A correction of the budget deficit for these factors will show deterioration in the budgetary situation.
For context and background, it may be recalled that the first major statistical trick the finance minister used in the management of the budget was to raise the level of budget deficit as a percentage of GDP for FY13 by paying out the accumulated amount of circular debt so that it showed up in the budget deficit of the last year of the PPP-led government.
Then he declared a reduction in the elevated deficit dramatically in the first fiscal year of the PML-N government. The deficit reduction was a statistical trickery achieved by keeping the circular debt accumulated in the first year of PML-government out of the budget and by various other statistical manipulations to jack up revenue and bring down expenditure rather than by structural fiscal reforms.
In the matter of the SBP’s autonomy, both the minister of finance and the IMF mission give mere lip service to it in their deliberations. They pay no attention to the violation by the government of both the Fiscal Responsibility and Debt Limitation Law and the SBP Act. The hollow statements of the IMF about SBP autonomy are repeated for cosmetic purposes. It seems the latest policy rate that was determined and announced by the finance minister was not enough to open the eyes of the IMF.
In the matter of interest rate policy, people are pulling their small savings out of the savings schemes of the government and shying away from keeping their savings in bank deposits due to negative real rates of return given to them. But the government, with the blessing of the IMF, has begun to lower nominal interest rates to add to the profitability of businessmen and industrialists and reduce the debt serving liabilities of the government.
There was another instance of the minister of finance calling all economic shots and the right hand of the government not knowing what the left hand was doing. The minister for privatisation declared that privatisation proceeds were used to the extent of 90 percent for the retirement of public debt whereas the budget documents show those being used to finance the budget deficit.
The price statistics are also manipulated/misinterpreted to show a positive outcome. Recently, a temporary decline in world oil prices led to the easing of prices of petroleum products with ta favourable impact on the price indices, but credit is being given by the IMF to the government for a decline in the rate of inflation. With monetary expansion at several times the rate of growth of GDP, the demand-pull inflation has remained high reflecting imprudent fiscal and monetary policies.
The IMF also declared that “the reform program remains on track”. It would have been enlightening for the people of Pakistan if the IMF had enlisted the reform measures that have so far been implemented by the government and/or are likely to be implemented in the period ahead.
These are poker games played by the government and the IMF, with the people and the economy of Pakistan being losers. The IMF is an outside player but such deception by our own government, elected to improve economic governance, transparency and accountability, is unforgivable.
The writer is a former governor of the State Bank of Pakistan.
Email: [email protected]

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