Thursday July 07, 2022

Dangerous disconnect

October 12, 2019

Given the dearth of actual good news during the present government’s term, attempts to spin bad news as good news or even manufacture good news when there isn’t any have become a matter of routine for the government’s ever-changing army of spokespersons. These are mostly conscious, desperate attempts to present failure (or mediocrity, at best) as good performance in order to appease the public. Recently, however, something even worse has begun to happen. The government has started to believe its own spin.

Take the government’s claims regarding macroeconomic stabilisation, for example. Recently, the government’s economic team held a press conference to share ‘good’ news with the public regarding the economy. As the finance adviser to the PM went through his carefully prepared points, it started to become obvious that the ‘good’ news wasn’t all that good after all.

For example, the adviser said that he expected GDP growth this year to beat the government target of 2.4 percent. There are two problems with that. One, the target itself was dangerously low to begin with. Even if GDP growth this year is significantly better than the target, say 3.5 percent, it would still be the lowest GDP growth rate in 10 years. Low enough to result in even more unemployment and business closures. The Asian Development Bank is projecting Pakistan’s GDP growth to be 2.8 percent this year, the lowest in South Asia.

Second, this government has a very recent track record of getting its economic projections horribly wrong. In the budget speech on June 11, the current minister for economic affairs stated that the government expected the fiscal deficit to close at 7.2 percent of GDP on June 30. It actually closed at a record 8.9 percent. The fact that the government’s projections were so off the mark for a fiscal year concluding in just 19 days from the date of the speech is both inexplicable and scary. It exposes the government’s harrowing inability to have any grip on its figures. Why then should anyone trust any of the government’s economic projections and predictions going forward?

The finance adviser also laid great emphasis on the reduction of the current account deficit during FY2019. The fact is that the entirety of that reduction was driven by a decrease in imports due to demand suppression rather than any growth in exports. Exports in dollar terms actually decreased during the period. Demand for imports was compressed by steeply depreciating the rupee and hiking the policy rate during a short period of time. These measures have significantly contributed towards the deterioration of the economy characterised by dangerously low growth, and rising inflation and unemployment.

Another bit of ‘good’ news the finance adviser shared was that tax revenues in the first two months of the new fiscal year had increased compared to the same period last year. What he conveniently failed to mention was the fact that the government actually missed its own relaxed tax target for these two months by a significant margin. The September target has also been missed taking the total revenue shortfall for the first quarter of the current fiscal year to a whopping Rs116 billion. At this point, there is a genuine risk that the government may not be able to achieve even half of the tax revenue increase it has targeted this year, which would have grave implications for the finances of the federal and the provincial governments.

It is worth remembering that the government not only missed the tax target for the last fiscal year by a wide margin, it actually collected fewer tax revenues than the preceding fiscal year (2018), a first in the country’s history.

The fourth and final bit of ‘good news’ was regarding inflation. The finance adviser said that inflation was below expectations, which begs the obvious question: how bad were those expectations? With inflation already in double digits, did the government actually expect it to be even higher?

The reality is that the rapid, debilitating rise in inflation we have witnessed over the past 14 months has mostly been self-inflicted – a direct consequence of the present government’s misguided policies. The doubling of the policy rate over a 14-month period has done little to stem the tide. Rather than addressing the self-inflicted core causes – sudden rupee devaluation and energy price increases – the decision to consistently raise policy rates has only exacerbated the problem by suppressing demand which has pushed the economy towards stagflation, a combination of high inflation and low growth. The ADB expects Pakistan’s inflation rate to be 12 percent this year, more than double that of any other South Asian country.

There seems to be a dangerously large disconnect between the government’s perception of the state of the economy and the actual economic ground realities. People are losing their jobs, businesses are shutting down, and a growing number of households across the country are finding it increasingly hard to put food on the table. The government can try all it wants to paint a rosy picture of the economy through press conferences and prime time talk-shows but such hollow attempts will do little to distract the public from the painful economic realities which they witness first hand on a daily basis when they go to the market to buy groceries, receive their gas bills or buy fuel at the petrol station.

The government’s economic team is living in a fool’s paradise. It is celebrating progress while the economy continues to deteriorate. Even if it does snap into reality, it doesn’t seem equipped to deal with the economic challenges created by its own government. After Imran Khan replaced his economic team’s poster boy back in April, the economy hasn’t fared much better under Team B either. The economic team alone can’t be blamed for the economic failures though. The problem is that Prime Minister Khan is still focusing all his energies on disparaging the opposition rather than getting down to the serious and necessary business of giving the economy direction and creating an enabling environment for economic activity.

Sadly, there are no signs that this will change, both due to lack of vision and capacity, but that does not mean that the country can afford to remain on the same path any longer.

The writer is assistant secretary general of the PML-N and a member of the PML-N's Economic Advisory Council.