Daily Times

The risk of copyright infringement notwithstanding, Batman would have been a superlative nom de plume. However, despite the Dark Knight’s unparalleled fan following in Pakistan, the latter’s economy is definitely beyond the former’s scope of interests. On the other hand, the State Bank of Pakistan (SBP) presented the report on the half year that ended on December 31, 2014 to parliament in mid-May 2015 with many encomiums on economic achievement. Timing is always of the essence when it comes to the economy; issuing a report after everyone else has already analysed and commented on the economy from here to eternity, or even gotten bored with the third quarter, is in essence begging for anonymity. A thorough reading of the report would tell you why. The articulation of the report deserves the highest award in bureaucratic excellence. Considering that the economy is not everybody’s cup of soup, all attempts have been made to keep the vocabulary and style of this article simple. Although the awkward question about the ability of politicians to digest anything to do with the economy, let alone make head or tails of the report, remains unanswered.
According to the SBP, the most significant achievement was the fortuitous improvement in the external account, the net payable or receivable between Pakistan and the outside world, the credit for which was singularly granted to the sudden fall in international oil prices. Workers’ remittances, another uncontrollable factor, is credited as another major saviour of the current account, covering up around 90 percent of the trade deficit, although the SBP remains sceptical about the indefinite growth potential of such remittances due to the projected slump in spending by Gulf countries pursuant to the slump in oil prices. And then there were CSF inflows of around $ 1.5 billion. The government issued a sukuk (bond) of one billion dollars in the international market, which, along with borrowings from the IMF, pushed the country’s foreign exchange reserves to a comfortable level.
The strategy of borrowing in dollars to increase foreign exchange reserves does have a cost. The SBP feels that the inevitable outcome is the increase in debt servicing in the long run (the growth in external interest payments in the first half was 25.6 percent). The SBP warns that by 2017 the restructured Paris Club payments will be due. Therefore, there will have to be a comparable stream of foreign exchange earnings but the SBP seems pessimistic of that happening and has predicted a drawdown in the country’s foreign exchange reserves. Let us not forget that, around the same time, the IMF will want to be paid back as well.
However, the IMF is happy for the moment since the government has met another target of reducing borrowing for budgetary support from the SBP. The report describes the modus operandi of this amazing accomplishment in detail. The SBP provided billions of rupees of additional funds to the banks through its open market operations, which the banks dutifully lend to the government at higher interest rates, making a pretty penny in the process. Since the banks have doubled their profits in a year via high yielding government securities, why should they take the risk of lending to the private sector at all? In the end, public debt has increased by Rs 565.3 billion and the IMF’s agreeing that the condition has been met is massively confusing. From a layman’s perspective, the fact that the utilisation of national savings by the government results in high costs being paid to the banks, which in most cases is remitted as dividends outside Pakistan, surely raises questions about the benefits of privatising these banks.
The increase in total public debt would have been much higher had the rupee not maintained its value, once again owing primarily to falling oil prices. The SBP obviously cannot comment on conspiracy theories yet the report completely ignores the stronger rupee and the need to build forex reserves, resulting in a loss of competitiveness from the real effective exchange rate, which stood at Rs 115.53 in December 2014, according the SBP.
The SBP points out that exports declined by 4.4 percent during this period; whatever happened to the celebrated increase in exports after Pakistan got GSP plus status? According to the SBP, the textile industry is plagued with structural issues, which are a hurdle in consolidating Pakistan’s position in the international market. Has the textile industry not been snatching concessions on the promise of increasing exports? The SBP believes that the Trans-Pacific Partnership will further negatively impact exports to the US and that cement sales to Afghanistan are also at risk due to competition from Iran. In conclusion, the SBP feels that export expansion is a must and that the government should also incentivise its local industry to substitute imports — an age-old formula. The overall trade deficit this year has reached $ 14.6 billion.
The SBP is concerned about the purchasing of wheat, especially since the government agreed to an increase in the support price when wheat prices across the globe were collapsing because of surplus production everywhere. Apparently, existing stocks in the limited government stores will need to be offloaded before new purchases are made, which are expected be high due to the “encouraging” assessment of wheat production. The SBP is concerned that in addition to increasing the cost of financing, there is a risk of wheat losses due to insufficient storage capacity. So what was the plan behind improving the area under cultivation, improving the availability of water and dishing out agro-credit?
The SBP is of the view that the slowdown in large-scale manufacturing will continue since the sector is not expected to experience any major relief in load management. The SBP points out that the power sector continues to suffer from high transmission losses and shortfalls in recoveries. Shockingly, the SBP admits to being clueless about how “these costs would be settled at the year end”. How many are aware that the expenditures of military operations result in a higher growth in general government services, which is a part of the GDP?
Inflation is down due to falling oil prices, allowing the SBP to reduce the discount rate, which consequently had a positive impact on government spending. So the IMF is very happy, which is in itself an enigma. What kind of a programme is this that dollar debt keeps increasing, family jewels keep getting sold, exports decline and all this is deemed to be within the scope of the program? Perhaps the country should use the increased foreign exchange reserves to pay off the IMF and find other solutions, like perhaps the Asian World Bank; after all, is China not a friend? At the end of the day, the SBP is probably quite like Batman; its report delivers its critique while wearing a mask but there are some things that even Batman cannot do. A storm is coming; can Pakistan adapt?

The writer is a chartered accountant based in Islamabad. He can be reached at syed.bakhtiyarkazmi@gmail.com and on twitter @leaccountant