International donor agencies like the Fund prefer to couch 'unfavourable' assessments in positive and encouraging terms wherever possible to ensure that relations with the administration remain cordial enough to ensure continued engagement in future. However, at the same time, it is not prudent for the careers of donor agencies staff to present a picture to its own Board of Directors - represented also by the country under review - that is far from the truth - an objective that accounts for understating and/or burying in the text key policy flaws. On a review of the IMF press release No. 17/227 by Business Recorder, one of the key policy flaws was referred to in the middle of the second long paragraph: "foreign exchange reserves have declined in the context of a stable rupee/dollar exchange rate." This statement, unfortunately, reflects the mistaken perception by both Prime Minister Nawaz Sharif and Finance Minister Ishaq Dar that a strong rupee is good for the economy and therefore given the depreciating currencies worldwide the real effective exchange rate of the Pakistani rupee has remained strong which explains why exports have been declining and imports rising for the past two years. Accompanying statistical data in the Fund press release refers to the real effective exchange rate (annual average percentage change) as negative 1.3 percent during 2012-13, a whopping 10.9 percent in 2015-16 and 4.6 percent in the outgoing fiscal year. It is therefore no wonder that terms of trade (percentage change) were effected to the tune of 7 percent in 2014-15, 10.7 percent in 2015-16 and a negative 0.9 percent this year (must be seen in the context of the year before). And in the middle of the sixth paragraph the IMF press release notes that "Directors called on the authorities to allow for greater exchange rate flexibility - rather than relying on administrative measures - to help reduce external imbalances and bolster external buffers." That recommendation unfortunately is unlikely to be heeded as Ishaq Dar has repeatedly ignored it in spite of persistent clamour by Business Recorder, economists and exporters that an overvalued rupee is disastrous for the economy.
The IMF mission chief for Pakistan's three-year Extended Fund Facility programme (September 2013-16), however, had acknowledged during the programme in a press briefing that our foreign exchange reserves were largely 'debt enhancing.' With exports declining, imports rising, and remittances declining due to a recession-like situation in the Gulf countries what exactly is Pakistan's total debt to Gross Domestic Product (GDP) ratio? According to Ishaq Dar and the budget 2017-18 documents, total debt to GDP ratio (gross) was 61.4 percent in the current year - down from 64.8 percent the year before - while total public debt (net) was 59.2 percent, below the 60 percent required under the Fiscal Responsibility and Debt Limitation Act 2005.
To achieve this remarkable rate, however, required a redefinition of debt which was provided for in the Finance Act 2017 whereby total debt was to equal public debt minus accumulated deposits of the provincial and federal governments in the banking system - a redefinition that understated the debt by around 2 trillion rupees. The IMF has not followed this redefinition and instead followed the global practice which accounts for the Fund maintaining that general government debt including obligations to the IMF was 67.6 percent of GDP in 2015-16 and 66.6 percent in 2016-17. Independent economists as well as this newspaper also challenge the GDP figure released by the Pakistan Bureau of Statistics, under the administrative control of the Finance Ministry, as much of the data is not synchronized with data released by other government departments as well as credible industry sources, though donor agencies do accept the government data, which implies that total debt-to-GDP ratio may be closer to around 70 percent as opposed to 66.6 percent projected by the Fund. Dar has also reduced the applicable rate on saving schemes of the National Savings Directorate which has reduced the rates of savings and given its identity with investment there will be greater need for borrowing by the government to meet its ambitious investment plans.
To conclude, the economic picture leaves a lot to be desired and there are clear indications that the Sharif administration is routinely resorting to data manipulation and redefining indicators to show better results. Sadly, this implies that the country would be compelled to go on another Fund programme in the not too distant future. Moreover, there are benefits and risks that financial globalization entails for developing countries, including Pakistan. One must, therefore, not lose sight of the fact that globalization also means integration of a local financial system of a developing country like Pakistan with international financial institutions, including the IMF.
Copyright Business Recorder, 2017