Muhammad Zubair Umar |
The economy is in a mess. There is consensus on this count. The point of dispute is whether the economy is in a mess because of previous rulers or is a result of the poor performance of the present rulers. Just as a reminder, Pakistan Muslim League-Nawaz (PML-N) was in power until May 2018.
Of course, no party ever comes in power with an absolute clean slate which would mean no liabilities and no serious economic challenges. Any major political party making a serious bid to gain power understands this basic principle – that it has to surmount serious economic challenges once in power.
If nothing else, Pakistan Tehreek-e-Insaf (PTI) has to be given credit for informing the nation of the serious economic challenges that Pakistan faced. After all, they were not just informing us of the problems but also making every Pakistani believe that it has the solution to all these problems. But once in power, we started to hear a completely different story. Simply stated the party now says that it does not have any solutions. Something wrong somewhere. If this narrative of PTI is true, then it raises fundamental questions. Consider the following:
What was the basis of the economic plan prepared before the elections? Did it not know the economic situation in the country? Which particular aspect of the economy was not known? Which macroeconomic indicators were not known? PTI had several members in the last parliament and some of them were part of important standing committees. As part of these important committees, the members had access to key information about our economy. They could invite anyone from the government or seek information from major stakeholders including ministries, regulatory authorities, State Bank of Pakistan (SBP), public sector companies. Basically, PTI needs to explain the rationale on which they prepared their plan and also inform the nation what was not known to them and why didn’t they know.
If the performance was outstanding and the economic difficulties were only due to the poor economic management of the previous rulers, why did the PM change his entire economic team?
Even after coming to power, they had enormous opportunities to take corrective actions. The supplementary budget presented in September 2018 was an opportunity to announce revised estimates in all respects – revenue, expenditure, and resultant fiscal deficit. The numbers were indeed revised but why then the record slippages? In January another supplementary budget was presented. Another opportunity to make correct forecasts. Again, slippages on a massive scale. What justification of revenue & fiscal deficit slippages within months? Is it normal? NO. What does it show of the PTI government in terms of quality? Extremely poor to say the least.
Not just before the elections but even after winning the elections, Prime Minister Imran Khan announced that he will not seek International Monetary Fund (IMF) assistance or go to friendly countries. In his address to the nation on August 19, 2018, PM made these announcements. The market players were astonished. And sure enough, the markets were negatively reacting.
If PTI’sperformance was outstanding and the economic difficulties were only due to the poor economic management of the previous rulers, why did the PM change his entire economic team? That included chairman Board of Investment (BOI), chairman Federal Board of Revenue (FBR), SBP governor, finance secretary, petroleum minister, and most important the finance minister. The dream of Naya Pakistan was only going to be converted into reality by the finance minister. Asad Umar was the poster boy. He was the brain. Either the decision of the prime minister is extremely poor or he is accepting the failure of his economic team.
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The main concern of the PTI government is the poor state of the economy that they inherited from the PML-N government. There can be arguments from both sides but what is the standard way of determining the status of the economy? Various macroeconomic indicators help us to understand whether a particular country has done well or not. The same indicators are used by leading global rating agencies like Moody’s and S&P to classify every country in terms of its economic performance.
Suddenly those worldwide standards are not acceptable. Cannot be funnier than this. Interestingly, there’s only one that they would like to pick up and talk about – current account deficit. All others like Gross Domestic Product (GDP) growth, size of GDP, per capita GDP, inflation, discount rate, revenue tax collection, foreign direct investment (FDI), etc. are not of any concern. They are also not concerned at the state of infrastructure development, including power generation, development projects like motorways, Gwadar development and quality public sector transportation projects. PTI government is also oblivious that the security situation in the country, as it existed in 2013, was a serious impediment to economic activity. The entire security scenario has completely changed for the better. Karachi is no more one of the most dangerous cities that it was in 2013 but thanks to PML-N initiatives, it is now a vibrant financial hub of Pakistan. So, what were the macro indicators reflecting when PTI took over in August last year.
- GDP growth was recorded at a 13 year high of 5.8%.
- Fiscal deficit was brought down from more than 8% during the last year of PPP rule to around 5%.
- Tax revenue was at a record level at more than Rs.3800 billion by the end of June 2018. Growing mostly at 20% per annum, PML-N increased it from Rs1900 billion to Rs3800 billion. This in spite of extremely low inflation and very controlled exchange rate.
- Inflation was at a record low at 3.9% during the last fiscal year of PML-N.
- SBP discount rate was at 40-year low contributing to an extremely low-interest-rate environment.
- Stock Market went up from 19,000 points to 53,000 points making our exchange one of the best performing in the world. As a result of positive economic direction and credibility of the government, our stock exchange was upgraded from frontier market category to an emerging market.
- Foreign exchange reserves reached a record level in mid-2017.
- More than 11,000 MGW of electricity was added making Pakistan self-sufficient in the energy sector. For the first time, electricity is being generated through the use of domestic coal in Thar.
- China Pakistan Economic Corridor (CPEC) was initiated and launched during this period. This has allowed far better infrastructure for the PTI government to pick up from there. While counting the liabilities, one should take into account the significant increase in economic activity as a result of motorways, highways, Gwadar port, etc. The benefits of such projects come over a period of time.
- As a result of doubling tax revenues, the contribution to provinces under NFC also doubled allowing provinces to spend more on education, health care, water management, public transportation, and other welfare projects. Punjab benefitted the most from this additional funding confirmed also by PTI Minister Dr.Ishrat Hussain in his book released in late 2017. And importantly, this was also appreciated and recognized by global rating agencies who consistently improved our economic outlook.
If the performance was outstanding and the economic difficulties were only due to the poor economic management of the previous rulers, why did the PM change his entire economic team? That included chairman BOI, chairman FBR, SBP governor, finance secretary, petroleum minister, and most important the finance minister.
GDP growth is expected to be around 2.5% while inflation will be in the range of 13%. The discount rate is expected to go further up in the range of 15-16%. All this will obviously have a devastating impact on the overall economy.
Of course, there were weaknesses in the economy most prominent being current account deficit. Till 2016 end, there was no issue with regard to current account deficit which had been kept in reasonable control. In 2017, it started to rise primarily due to the significant increase in import of plant & machinery, especially, related to power projects. The 3 LNG projects which are now producing 3600 MGW of electricity, were imported during this time. So, at least, there is some justification for rising current account deficit.
The ideal way to improve the current account deficit is to increase exports. In spite of massive and unprecedented devaluation in the last 10 months, exports have not shown any increase. In fact, they are slightly down. The reduction in current account deficit has been largely achieved through a reduction in imports. Overall imports have reduced by approximately dollars 4 billion; more than 2 billion have come as a result of the reduced import of plant & machinery. The policy to contain imports have helped in bringing down current account deficit but it’s important to understand the downside of this policy. It has largely contributed to the overall slowing down of the economy. Consider the following:
- GDP which stood at 315 billion dollars has dramatically come down by 35 billion dollars to 280 billion dollars. So, we sacrificed 35 billion dollars to achieve a 4 billion dollars of reduction in current account deficit.
- As a result of slowing down our economy, GDP growth came down from 5.8% to an estimated 3.3% this year – slowest in the last 6 years.
- Per capita GDP went down by more than 8% during this fiscal year.
- Large scale manufacturing plummeted with negative growth.
- Agriculture growth was less than 1%.
- Inflation has shot up close to 8% for the full year.
- FDI has plummeted during the year and is down 50%.
- Slowest revenue growth in the last 21 years.
- PTI government has also run the largest ever fiscal deficit in history.
- Country’s main bourse has only seen bloodbaths in the last 10 months. Several billion dollars have eroded from the stock exchange and it literally continues to bleed on a weekly basis.
- The rupee has been devalued against all major currencies and the downward spiral continues. The wild swings in the last several months have resulted in negative sentiments in the market.
- SBP discount had almost doubled from 6.25% to 12.25% making borrowing more expensive than ever resulting in curtailment of economic activity. More than 45 lac Pakistanis have been pushed below the poverty level in the last 10 months.
- More than 12 lac Pakistanis have lost their jobs in the last 10 months (were they not promised additional jobs?) Now let’s see what was promised by the leadership of PTI before the elections. The economic situation was not just to improve but significantly improve with the induction of PTI into power. It was to happen based on simplistic ideas such as:
- Money laundering to the tune of 10 billion dollars on an annual basis was taking place according to PTI. Since the money launderers would no more be in power, this money would directly help in improving our foreign exchange position. And that is why the IMF or assistance from friendly countries was never a consideration.
- According to PTI, corruption to the tune of Rs10-12 billion was taking place on a daily basis. With Imran Khan in power, this significant amount would be saved. That is why we were promised that tax revenues would go up to Rs8000 billion in 1 to 2 years. Finally, the looted money of 200 billion dollars stashed outside Pakistan would be brought back. This was a commitment repeated by Imran Khan in full public view.
In addition to above, laughable commitments such as making 50 lac housing units and providing one crore jobs were made weeks before the elections. One crore jobs mean an average of 20 lac jobs per year. That is only possible if GDP growth is more than 7% per annum. If growth rates of 3% or less were a natural consequence of PML-N policies, then why was such a monumental commitment made in July 2018? And can anyone in PTI explain just what was the basis of committing 50 lac housing units? After almost one year, we have no details of this farfetched commitment.
According to all independent sources, including multilateral agencies, the next few years are going to be even worse in all respects. GDP growth is expected to be around 2.5% while inflation will be in the range of 13%. The discount rate is expected to go further up in the range of 15-16%. All this will obviously have a devastating impact on the overall economy. We expect another 50-lac people going below the poverty line and almost 20 lac Pakistanis will lose their jobs in the next year.
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Before I close, it’s important to talk briefly regarding this oft-repeated allegation that massive debt was accumulated by the previous government and that in a way is a contributing factor in our economic misery. The reality is quite different. In the five years of PML-N rule, total public debt increased from 14,000 billion to more than 24,000 billion rupees – a total of Rs.11,000 billion. PML-N rule also left in the government treasury about Rs.1500 billion which means a net borrowing of Rs9,500 billion in five years. Compare this with PTI’s borrowing so far. It has already borrowed Rs.4,000 billion and will reach a figure of Rs.5,000 billion in its first year. 5,000 in one year versus 9,500 in five years and one would start to wonder if the PM even knows what’s happening in his own government?
Muhammad Zubair has served in the PML-N government as Governor Sindh, Chairman Privatization Commission and Chairman Board of Investment. Before entering politics, he served for 26 years with IBM and worked as Chief Financial Officer in Middle East, Africa and Pakistan.