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The best and worst of times


May 20, 2019

Prime Minister Imran Khan’s advice to the nation to grin and bear the hard times until the economy begins to look up is at once heart-warming and heart-breaking.

It’s heart-warming, because at long last we have a leader who instead of generating false hopes is willing to have a heart-to-heart with the nation. It’s heart-breaking, because when the head of the government himself admits that the chips are down for the economy and that the people should batten down the hatches, by all accounts the country is up the creek. This reminds us of the famous passage from ‘A Tale of Two Cities’: “It was the best of times; it was the worst of times….”

The performance of the economy in the current financial year (FY19) is one of the worst over the past one decade. The latest official projections put economic growth for FY19 at 3.29 percent, which is significantly lower than the 5.8 percent growth registered during the preceding financial year (FY18) as well as the 6.2 percent budgetary target. These projections jibe with the forecasts made by the frontline multilateral institutions – the IMF, the World Bank, and the Asian Development Bank – of growth rate between 2.9 and 3.4 percent for the economy.

Seen over the last ten years, it was in FY10 that the economy had expanded at a lower rate – at 2.6 percent. The modest growth rate is underpinned by 0.85 percent and 1.4 percent expansion of agriculture and manufacturing respectively. The dismal performance of the commodity-producing sector, which is labour intensive, doesn’t bode well for employment generation, which was one of the star pre-poll promises of the ruling party.

Not only has the growth rate decelerated, the projected size of the economy has also shrunk in dollar terms to $280 billion at the end of June 2019 to $330 billion a year ago, because of substantial exchange rate depreciation. As a rule, the bigger an economy, the more attractive it is for foreign investors. On account of the low level of domestic savings and thus investment, foreign capital inflows are essential for giving a boost to the economy.

At the same time, inflation is galloping on the back of a spike in oil, gas and electricity prices and fall in the value of the domestic currency. This simply means that a household can now buy fewer goods with the same income. For the majority of citizens, the litmus test of how well or poor a government performs consists in their ability to buy a typical basket of goods and services within their limited resources. Inflation erodes both real incomes and monetary assets of the people and thus makes them worse off. It’s then that their disappointment with the government sets in.

The prime minister, like any other seasoned politician, is painfully aware of such swings in public sentiments. He also knows for a fact that the recently finalized $6 billion credit agreement with the IMF – which inter alia provides for Rs600 billion to Rs700 billion additional revenue measures, increase in utility charges, and a market-based exchange rate – would further ratchet up the cost of living and thus exacerbate people’s struggles. But, even worse, he knows there’s little he can do for now. That’s why he is advising people to pin their hopes on better days ahead.

While he was in opposition, Imran Khan would give the government a rap on the knuckles for ‘making a mess’ of the economy. Now that he is at the helm, he is in the line of fire. The economy, no doubt, is in a bad shape, to say the least, but it would be unfair to lay all the blame at the door of the PTI government. A glance at the major economic indicators over the past 15 years, which correspond with three election cycles and three different governments, would reveal that the economy has been made to run round in circles. When the movement is circular, change at best is an illusion.

During 2002-08 when Gen Pervez Musharraf and his king’s party, the PML-Q, were in the saddle, the economy registered a remarkable healthy average annual growth of 6.5 percent. In fact, one of the years, FY05, registered 9 percent growth rate, which is arguably the highest ever. However, FY08, the final year of the PML-Q government, concluded with the current account deficit of 8.2 percent of GDP, trade deficit of 12.3 percent of GDP, and fiscal deficit of 7.3 percent of GDP. The rupee-dollar parity, which remained relatively stable at 60 during the first four years of the government, racked up to 68.3 by the close of FY08. As a result, the incoming PPP government had no choice but to go to the lender of last resort – the IMF – to bail the economy out. In exchange for the capital inflows, it adopted stabilization (read: contractionary) policies.

Not surprisingly, FY09, the first year of the PPP government, saw the growth rate slump to 0.4 percent, which to date remains among the lowest in the country’s history. Thus in a span of four years, the economy recorded one of its highest and lowest growth rates. On the whole, during FY09-13, economic growth remained subdued at 2.8 percent per annum. By the time the PPP government had completed its five-year term, the economic predicament had become so unenviable that the new PML-N government again had to go back to the IMF, despite its leadership’s earlier claims to break the begging bowl once and for all.

Under the PML-N, the economy regained momentum and registered average annual growth of 4.8 percent. However, as in case of the PML-Q government, the growth entailed substantial deficits – 6.8 percent fiscal deficit and 5.7 percent current account deficit – a rapidly depreciating rupee and falling foreign exchange reserves, which made another IMF programme a fait accompli no matter which party formed the government. The PTI’s capital mistake was that it fell between two stools on seeking IMF assistance – probably its leadership counted too much on bringing back the imaginary $200 billion stashed away by unscrupulous Pakistanis – whereas in view of the state of the economy it inherited, it should have gone to the multilateral donor much earlier.

The setbacks suffered by the current government on the economic front – fall in growth and spike in inflation rates – don’t mean that the PML-N’s economic management was deft. Take an example. The former ruling party takes the credit of having kept the exchange rate stable for over three years under the stewardship of former finance minister Ishaq Dar, which kept inflation, and by implication interest rates, low. Be that as it may, the feat was accomplished by pumping foreign currencies into the market, which brought down the foreign exchange reserves until pursuing such a policy was no longer sustainable. It was Dar’s successor Miftah Ismail who, in December 2017, upended the former’s exchange rate management and let an over-valued rupee depreciate as per its market value. Because of weak fundamentals, such as an enormous trade deficit, it was a foregone conclusion that a free floating rupee would find it exceedingly difficult to hold itself against the greenback and other hard currencies.

Neither Ishaq Dar nor Asad Umar is the author of the current economic mess. Instead, successive governments, which failed to address the structural economic constraints – a narrow manufacturing base, too much dependence on primary products and low value-added manufactures for generating export revenue, a corporate sector which is short on competitiveness and thrives on subsidies and rent seeking, an inefficient public sector, and widespread tax evasion – must take the flak.

An IMF package is the bitter, yet unavoidable, fruit of such collective and consistent failure. This brings us to the classical definition of insanity: Doing the same thing over and over again but expecting different results. Let’s hope Imran Khan’s government doesn’t measure up to this definition.

The writer is an Islamabad-based columnist.

Email: [email protected]

Twitter: @hussainhzaidi