Daily Times

It is all about the economy. The State Bank of Pakistan (SBP) recently issued a white paper on the state of Pakistan’s economy in 2014-2015. White because that was the colour of the paper it was printed on although all attempts were made to look for a blue paper to avoid this controversy. Publishing the report in December 2015 on events occurring till June 2015 is within the SBP’s regulatory definition of recent, which they should seriously look into in any case.

The report extends to around 130 odd pages and it can be safely asserted that other than a few committed students of economics, hardly anyone read it beyond the 12-page overview. Curiously, the outlook starts positively and ends on a positive note, which gives an impression that everything with the economy is hunky-dory. So, most likely, the summary of the summary presented to the ruling elites by their ever-diligent staff is even sweeter, probably asserting that the SBP has vehemently endorsed government policies and everything is wonderful.

It is only when you read the report diligently that you realise a lot has been said between the lines and much more in the fine print, which needs serious consideration, especially if and when a charter of economy is eventually agreed too. Albeit, whilst it may have been easier to agree to a charter that favoured all politicians, it is improbable that these very stakeholders can agree on how to manage government finance, or mismanage for that matter. Just to placate the editor, democracy bashing is not the objective today, although that is always more fun. Today, and perhaps next week, it is all about the economy in an attempt to create awareness of the risks that Pakistan faces on the economic front. Protection from external and internal physical threats is a necessity and a top priority but, as history evidences, without finances wars are as good as lost. Look at Pakistan’s budget today: the biggest outlay is for debt servicing followed by defence, which is half of the former. We are winning the war against terror but are we winning the war against debt? And if we lose the latter, can we succeed in the former? Think!

So let us get to the report itself and what it says. A clarification and acknowledgement of credit is required; it would be difficult to give credit to the SBP every time an extract is included. Hence, in general, whatever is set out below and in ensuing articles is directly or indirectly from the SBP report and all credit is due to the SBP for an immensely informative and detailed report. The value addition in this and planned future write ups is to simplify economic jargon and make it understandable for a layman.

The report in the first sentence acknowledges that the Pakistani economy did reasonably well in fiscal year (FY) 2015 with the GDP posting a marginal increase over last year. In the section on economic growth, it is explained that the impetus to growth came from a strong service sector and a modest recovery in agriculture. So, why did the service sector grow? Because the government increased its salaries, which pushed up growth in general government services, and to do that since the government borrowed massively from the banking system that helped finance and insurance achieve higher growth. If this is exactly true, all the government had to do was increase its salaries more by borrowing even more from the banks and GDP would have gone through the roof! This should establish how useless the GDP as an indicator of economic health of the country is. Irrespective though, the SBP points out that, according to a World Bank Report, even if Pakistan grows at an average 8.3 percent, it will not be able to reach the income level of the Organisation for Economic Cooperation and Development (OECD) countries before the year 2050.

In the first paragraph the report highlights that inflation recorded improvement. The SBP believes that this unexpected decline was mainly driven by a sharp fall in global commodity prices especially POL, wheat, rice, palm oil, etc., all uncontrollable factors. Kudos, however, for the government to pass on the benefit of the lower POL prices because, if they had not, the common man could have done nothing; after all it is a democracy. The following extract is what explains why the common man is still feeling the squeeze despite official inflation being at 4.5 percent: “In fact, the data on prices indicate only 14 items of 89 in the CPI basked registered deflation. Furthermore, items like house rent and education have consistently registered inflation of 6.7-8.2 percent and 7.4-13.8 percent respectively during the last six years. Analysis of the more detailed data (487 items included in the CPI basket) reveals that during the last five years, the number of items showing increase/no change in prices remained between 88-94 percent.”

Fiscal balance and current account balance also recorded improvements. One of the causes for that, as per the SBP, is a gem. Apparently, 55 percent of Pakistan’s foreign debt is contracted in currencies other than the dollar and since the dollar appreciated against these currencies this provided a revaluation gain of $ 2.3 billion. And, once again, aptly articulated by the SBP: “As this gain depends only on the movements in foreign currencies the revaluation loss is also equally likely in case of changes in exchange in some different direction. As long as these gains or losses remain just a book entry, they have no economic implications, except making debt indicators look good or bad. However, when realised, they can affect fiscal and external account.” So, for the time being, looking good!

As regards the current account deficit narrowing, the SBP believes that this was primarily because a much higher workers’ remittance came into the country. Albeit, one of the factors cited for this increase is worrying: diversion on remittances from informal to formal. Frankly, this then is again a book entry because the dollars were in any case coming to Pakistan before as well. Worse, the SBP believes that future growth in workers’ remittance is at risk if the slump in the oil market persists. Another factor that surely played a major role in an improved current account is the savings of $ 3.2 billion due to the decline in value of petroleum imports; imagine what would have happened if the government had to arrange and additional three billion dollars’ financing.

Albeit, a closing comment: remarkably there are just a couple of passing paragraphs on the China-Pakistan Economic Corridor (CPEC) in the entire report, which is surprising. After all, the CPEC is the knight in shining armour and all expectations are that as soon as the corridor gets completed, Pakistan will be a booming economy. So, why would the SBP not pin all hopes on the corridor too?

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