Thursday July 07, 2022

Race to the bottom

December 13, 2019

The last week of November was a good week for the government’s economic team. Not because they did anything good but because someone else was even worse. And that takes some doing.

During that week, the economic team had the limelight of incompetence gloriously stolen from them by the government’s legal team which failed to put together a basic summary and notification for the appointment of the COAS despite having several chances to get it right.

Staying true to PTI tradition, the legal team subsequently held a press conference to try and spin this embarrassing failure as a victory. It ended up looking like a celebration of their own incompetence. To make matters comically worse, the same team that couldn’t draft a summary will now attempt to draft a bill on the same matter. Some jokes write themselves.

The economic team tried to use the temporary breathing space gifted to them by the legal team to once again try and push the narrative that the economy is improving despite the reality being to the contrary. Their claims of improvement have centred around two indicators: foreign investment and current account deficit. Their silence on other more fundamentally important economic indicators has been telling. More on that in a bit but, first, a couple of humble submissions regarding the two indicators the government can’t stop tweeting about.

The increase in foreign investment the government is celebrating has primarily been driven by speculative international investors who have invested in the government’s short-term securities, more commonly known as Treasury Bills or T-Bills. These investors are attracted by the State Bank’s high policy rate, a whopping 13.25 percent right now. They are parking their money in Pakistan’s T-Bills for a few months to earn a quick, handsome interest at the government’s expense, and then whisking that money away.

None of these investments is contributing to the creation of jobs, income or production. Pakistan is simply being used as a parking lot to make a quick buck. And the people of Pakistan are paying for it. While foreign speculative investors benefit from the high policy rate, our economy is suffering because of it. The double-digit policy rate has contributed to a sharp economic slowdown while failing to achieve its primary objective of curbing inflation.

The government’s second main claim regarding a decrease in the current account deficit also possesses an ugly underbelly. This decrease has largely been a result of a reduction in imports, and not of any substantive increase in exports. Even this reduction in imports is not of the good kind. Economic activity overall and production in particular have steadily declined over the past 15 months. Large-scale manufacturing (LSM) output contracted for the sixth month in a row in September without any signs of improvement.

Depressed levels of production have caused a decrease in the import of raw materials, machinery and components used for production. This has been the primary driver of the reduction in the current account deficit. As an example, low demand for automotives resulted in a 27 percent decline in the import of CKD/SKD kits, used in the production of cars, motorcycles and heavy vehicles, in the first quarter of the current fiscal year. Overall car sales have plunged 44 percent in the first five months of this fiscal year. Other industries have witnessed a similar trend. Factories are either shutting down or cutting back. This should be a cause of concern rather than celebration for the government.

Now let’s turn to the economic indicators the government doesn’t talk much about. During November, inflation rose to 12.7 percent, the highest level in nine years. Food inflation was even higher at 19.3 percent in rural areas and 16.6 percent in urban areas. You won’t see the prime minister tweeting about that. This debilitating inflation is a direct consequence of the government’s policies – mainly devaluation and the increases in energy costs. Recently, the government increased the power tariff once again, this time by 26 paisas per unit.

Matters are similarly bleak on the growth front. In this government’s first fiscal year, GDP growth slowed to 3.29 percent, the worst in nine years. Things are only expected to get worse this year. The Asian Development Bank (ADB) is projecting Pakistan’s GDP growth rate to be 2.8 percent in the current fiscal year, which would be the lowest in a decade. Unsurprisingly, the government is struggling on the revenue front as well. Tax revenue shortfall in the current fiscal year has already reached 211 billion rupees. It is also worth highlighting that the State Bank’s foreign exchange reserves are actually lower now ($9.1 billion on November 29) than when the current government assumed office in August 2018 ($9.9 billion).

The national economy is sinking deeper and deeper into stagflation – a combination of low growth, high inflation and rising unemployment. An increasing number of people are being pushed below the poverty line. On the ground – in markets, factories and offices – there is a strong sense of economic despair. Businesses closures and production cutbacks are resulting in joblessness and brain drain as our best and brightest look for employment abroad due to shrinking opportunities at home.

There is a sense of resignation that this government has nothing left to give on the economic front, and a general acceptance of the fact that the government is incapable of managing the economy. The government’s denial of its own economic failures has only further strengthened this sentiment. One sentence from the finance adviser last month exposed how out of touch this government is with the ground realities. His claim about tomatoes being available for sale for 17 rupees per kilo ranks right up there with the PTI’s greatest hits such as the ‘55 rupee per kilometre helicopter ride’. It would be funny if it weren’t so terribly sad.

Incompetence and failure has been a trademark of this government. Dreadful mismanagement of the economy is only one of this government’s many failures. Lack of leadership on the lockdown in Kashmir, CPEC delays, crop failures, railway incidents, BRT delays, suppression of media freedom, deterioration of law and order, paralysis in parliament – the list is endless. Blunders and mistakes have become the new normal. Ministers, advisers and special assistants are fiercely competing for the title of the Worst Cabinet Member. The sooner the people of Pakistan are saved from this race to the bottom, the better.

The writer is assistantsecretary general of the PML-N and a member of the PML-N’s Economic Advisory Council.


Twitter: @BilalAKayani