The present government is completing its five-year tenure. This is an opportune time to review the economic performance of this government. We begin by listing different economic challenges that this government inherited as well as massive opportunities that came their way. In other words, we assess what was the state of the economy the present government inherited in June 2013 versus what is the state of the present government leaving behind economy.
Inheritance: It goes without saying that the present government inherited an extremely fragile economy in June 2013. It inherited a nervous private sector, declining investment-both domestic and foreign, low economic growth (averaging 3.2% per annum), rising unemployment and poverty. It also inherited a large fiscal deficit (8.2% of GDP in 2012-13 including circular debt) owing to faltering resource mobilization efforts on the one hand and reckless spending on the other. At the same time, the country was suffering from rapidly declining foreign exchange reserves, a rising debt external and circular debt burden, a looming debt repayment crisis with the country heading towards external debt default, as well as severe electrical power shortage.
In addition, the government had inherited weak key economic institutions like the Ministry of Finance, State Bank of Pakistan (SBP), Securities and Exchange Commission (SECP), the Planning Commission, and various regulatory bodies like Oil and Gas Regulatory Authority (Ogra), National Electric Power Regulatory Authority (Nepra), etc.
These were indeed formidable challenges by any standard and required extra-ordinary courage and sagacity on part of the elected leadership to address these multi-dimensional challenges. Prior to taking charge, the newly-elected government claimed to have a competent team of ministers and advisors who were fully cognizant of the economic challenges.
Where do we stand today after 5 years? What is this government leaving behind for the next government? Have they successfully addressed the economic challenges or are they leaving behind a more fragile economy?
Opportunities: No government in the country's history has ever received such a large number of God-gifted opportunities in such a short period of time. Did the government benefit from these opportunities or did it simply squander them because of incompetence? These opportunities include the following: First, the country's security environment improved significantly due to the Operations Zarb-e-Azb and Radd-ul-Fasaad.
Second, the Rangers' operation in Karachi brought the law and order situation near normal, restoring the confidence of the industrialists, business community, traders, bankers and most importantly giving a sense of security to the people of Karachi. Karachi, the country's major economic growth engine, is now ready for business.
Third, the China-Pakistan Economic Corridor (CPEC) happened to be inaugurated during the present government's tenure, has dramatically changed Pakistan's perception abroad. It has sent a strong message to global investors that Pakistan is now open for business. This project has brought Pakistan on the global economic radar.
Fourth, the collapse of international oil and commodities prices has provided an unimaginable relief to the government. The oil price fell to less than one half compared to the prices that prevailed during mid-2014. Such a bonanza reduced the country's oil import bill significantly, keeping the current account deficit at a minimum, thereby helping in building foreign exchange reserves thus saving the country from further accumulating over $20 billion in external debt. This enabled the government to keep inflation at its lowest in decades, thus providing room to the SBP to cut discount rate to its lowest in decades and thus providing opportunity to the private sector to invest more in order to revive the economy.
Fifth, extra-ordinarily benign IMF simply rolled out billions while keeping its eyes and ears closed. They accorded 15 waivers in a three-year IMF programme. Perhaps, never in the history of the IMF has the world witnessed the Fund showering such kindness upon any country. The extent of the kindness was such that the IMF, otherwise a highly professional institution, kept its eyes and ears closed even when the country's finance minister was resorting to large-scale manipulation of statistics.
Finally, a docile parliament and a friendly opposition leader along with his party, provided all the necessary support to the government. They never raised contentious issues in the Parliament about the way the economy was being managed.
As will be seen momentarily, the present government squandered these opportunities, failed miserably in addressing the economic challenges that they inherited, extensively damaged key economic statistics through large-scale manipulation, attempted to provide false sense of prosperity to the masses, damaged the economy and institutions, made the country's economy even more vulnerable, thus leaving behind trillions of rupees of unpaid bills. In short, this government is leaving behind the economy in shambles.
During this government's tenure, we have witnessed leadership being non-serious in running the state, in general, and its economy, in particular. The finance minister has had little real understanding of the economy - being a Chartered Accountant, he relied heavily on accounting tricks and gimmickries. Manipulating budgetary numbers, forcing the tax authority to report grossly inflated revenues, forcing the statistical authority to generate growth numbers to his liking, changing the definition of variables to present rosy picture of the economy, bringing the country's Central Bank under his thumb, and most importantly, appointing pliant officials in key economic institutions have been the finance minister's contribution towards the downslide of the economy.
Was he alone responsible for damaging the economy? The answer is certainly not. He was ably assisted by his close associates at the Ministry of Finance, Federal Board of Revenue (FBR), SBP, EAD and SECP.
Economic performance: Let me now turn to briefly summarize the state of the economy as it exists today and what the present government is going to leave behind. During the last four years (2013-14 to 2016-17) economic growth, according to the official statistics, accelerated from 3.7 percent in 2012-13 to 5.3 percent in 2016-17 (See Table).Economic growth numbers calculated by independent economists for the last four years areas reported in parentheses which is much lower. For instance, according to independent calculations, as compared with 3.7 percent growth in 2012-13, the average growth rate of the last four years stood at 3.6 percent per annum-more or less in line with 2012-13. How can growth accelerate in the midst of declining private investment, declining production and consumption of electricity and worsening of human capital (both literacy rate and gross enrolment in primary school have declined)? Economic growth is estimated to be 4.2 percent this year.
The bottom line is that economic growth for the last one decade has averaged below 4 percent resulting in the worsening of unemployment, particularly youth and primary age unemployment situation in urban areas. This has forced the government to not to release employment/unemployment statistics since 2014-15.
Performance of agriculture has remained lackluster over the last decade, averaging 2.3 percent and is most likely to remain at 2.5-3.0 percent this year. Agriculture during the last four years of this government has also grown at an average rate of 2.3 percent. Similarly, services sector performance has also been inflated to arrive at a "desired" GDP growth number. Large-scale manufacturing numbers were overstated to arrive at overstated GDP growth number. This sector is likely to grow in between 2.5-3.0 percent in 2017-18 Investment as a percentage of GDP has virtually remained stagnant at 15.5 percent over the last one decade (2008-17) and yet growth accelerated during the last four yea How can this be possible?
Budget deficit numbers have remained controversial over the last four years as well. The manipulation of budgetary numbers range from changing the definition of revenue, expenditure, budget deficit to accounting gimmickries. Budget deficit stood at 8.2 percent of GDP with circular debt in 2012-13, remained more or less at 8.0 percent with same definition and most likely to deteriorate further in 2017-18.
Public debt has reached Rs 21.8 trillion in 2016-17 from RS. 14.3 trillion in 2012-13. In other words, the present government has added Rs 7.5 trillion in public debt in the last four yea It has added Rs 657 billion in just three months of the new fiscal year, that is, adding Rs 219 billion per month! With this scale of borrowing, the present government is going to add at least another Rs 2.5 trillion of public debt in its last year in power. Therefore, the present regime will be adding Rs 10 trillion of public debt during its tenure. As percentage of GDP, public debt has increased from 64 percent to 68.4 percent by 2016-17 and most probably will remain in the same neighborhood in 2017-18.
External debt and liabilities have surged from $61 billion 2012-13 to $89 billion by end-December 2017. Most likely, it is going to reach $96 billion by end-June 2018. In other words, the present government has added $28 billion in debt thus far and most probably may end their tenure by adding $35 billion to external debt. Had the international price of oil remained at mid-2014 level ($110/barrel), the regime would have added $55 billion in debt.
Current account deficit has also worsened dramatically during the tenure of this government. Current account deficit was $2.5 billion or 1.1 percent of GDP in 2012-13 when average price of oil was$108/bbl but deteriorated to $12.4 billion or 4.1 percent of GDP in 2016-17 with oil prices averaging $50/barrel. The current account deficit is further going to deteriorate to $18 billion or 5.3 percent of GDP in 2017-18 - the last year of this government.
Finally, few words on foreign exchange reserves. Pakistan's foreign exchange reserves were $6.0 billion in end-June 2013 but increased to $16.1 billion by end-June 2017. These have now declined to $12.8 billion by February 9, 2018. These reserves number is misleading. It is not the true reserves as it contains around$5.5 billion of commercial banks money borrowed in forward markets. After adjusting of forward market borrowing the foreign exchange reserves stood at $7.3 billion and not $12.8 billion. To keep the foreign exchange reserves at certain minimum level, the SBP has resorted to borrowing from commercial banks in forward market.
The present government inherited $6 billion in foreign exchange reserves with $61 billion of external debt and liabilities. When it leaves in June 2018, the true foreign exchange reserves would not be much different from what the government had inherited. However, the government will also leave with $96 billon of external debt. Put differently, the government inherited a net external debt and liabilities (adjusting forex reserves) to the tune of $55 billion but will leave a net external debt of $89-90 billion!
Leaving behind: All in all, the present government will be leaving the economy in a worse situation compared with what it had inherited. They squandered the God-gifted opportunities through mismanagement due to an incompetent economic team. The new government will inherit an extremely fragile economy, a nervous private sector, declining investment-both domestic and foreign, low economic growth (4.0%), rising unemployment and poverty, as well as growing income inequality. They will also inherit a large fiscal deficit (over 8% of GDP), an alarming rise in public and external debt, low foreign exchange reserves, over RS. 2 trillion of unpaid bills, corrupted statistics, thoroughly weakened key economic institutions, and, most importantly, a hostile external environment. These will indeed be formidable challenges for the new government.
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Table
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Key Economic Indicators
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Items 2012-13 2016-17 2017-18
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Real GDP growth 3.7% 5.3% 4.2%
(4.1%)
Agriculture 2.7% 3.5% 2.5-3.0%
(2.0%)
Large-Scale Manuf. 4.5% 4.9% 3.5-4.0%
(3.5%)
Investment 15.0% 15.8% 15.0%
(% of GDP) (15.2%)
Budget Deficit 8.2% 5.8% 8.2%
(as % of GDP) (8.0%)
Public Debt Trillion Rs) 14.3 21.8 24.4
Current Account Deficit (Billion $) 2.5 12.4 18.0
(as % of GDP) 1.1 4.1 5.3
International Price of Oil ($/bbl) 108 50 56
External Debt and Liabilities (Billion $) 60.9 83.0 95-96
Net External Debt and Liabilities (Billion 55 73 89-90
Foreign Exch. 6.0 16.1 13.5
Reserves (Billion $) (10.0) (7.5)
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(The writer is Principal and Dean at NUST School of Social Sciences and Humanities, Islamabad. Email: [email protected])