But a close reading of the Pakistan Development Update April 2014, as the report is called, raises more questions than it answers. Let us look at some of the report’s key contentions.
The World Bank says that growth is picking up, due largely to a revival of the industrial sector, as well as services. The revival in industry, it says, is due to better energy supply and greater investor confidence in the new government’s policies. Data from the Pakistan Bureau of Statistics (PBS) is quoted to the effect that growth in large scale manufacturing is expected to top 5% in the current fiscal, compared to less than 3% in the previous year. This is indeed very heartening, except that the PBS data indicates that the growth in industry is being driven largely by a significant upturn in fertilizer production (almost 25% in the last year), which has revived following the government’s effort to improve gas supply to the sector, not least by directing supplies of Mari Gas to Engro. Growth is also apparently high in food and beverages in general, and in leather goods – both sectors where background documentation is not too stellar as they are made up of many small enterprises in addition to some big ones. The report says that growth in the sugar industry is 78%, but makes no attempt to explain this unprecedented and obviously highly inflated figure beyond casually mentioning that it is “seasonal.” If the growth being reported is year on year, why should seasonality matter?
Looking at PBS statistics shows that textiles, which constitute 20% of industrial value added, are showing growth of barely 2% over July to February 2014. With the grant of GSP plus status to Pakistan by the EU in December 2013, there is a real opportunity for the textile industry to boost exports. But with large-scale closure of textile factories in the last few years, and a shift of capital to Bangladesh by Pakistani textile magnates, one hopes that the sector is well placed to take advantage of the EU concession. This is something that the World Bank could have commented on. Instead, the report cites growth in textiles as one of the drivers of industrial growth – with this information placed right next to a graph showing very low growth in the sector.
[quote]A daily borrowing of Rs 2 billion is only slightly higher than that of the last government[/quote]
There are other questions that the Bank should have asked, or issues that it should have attempted to explain while reporting on government data. For instance, it reports that the government has borrowed Rs 431 billion from banks (central and scheduled) over the period from July 2013 to January 2014. This comes to a daily borrowing of Rs 2 billion, which is slightly higher than the average daily borrowing of the last government (which had caused uproar). The World Bank alludes to the fact that this is all quite unfortunate, and then in the next paragraph, cheerfully reports that headline inflation has fallen below 9%. How exactly it is possible for inflation to remain in single digits when the government is borrowing like crazy from the central bank is not explained, or even mentioned as an unusual occurrence. The Bank explains low inflation, in part, by improvements in the food supply chain due to “good weather.” Apparently sunny days have a way of deflecting the effects of money creation, which is good news for all of us.
A similarly sunny outlook continues in the Bank’s comment on the government’s reform agenda. The government is said to have initiated “bold and far reaching reform of the tax sector.” Given that the government has recently rolled back almost every additional revenue collection measure proposed in the last finance bill, not to mention making no attempt at all to continue with documentation of the economy, this was a bit of a surprise. However, it appears that the Bank’s definition of “bold and far reaching” is for the Federal Board of Revenue to send out notices to potential, but unregistered taxpayers. This should be the standard practice for any self-respecting tax collection agency anywhere in the world, but in Pakistan, it leads to a laudatory paragraph in a report on the economy. Never mind that there is no mention of a follow up – what happens after the notices have been issued? Is there any attempt to prosecute, or even a law in place to allow seizure of assets etc? This was one of the demands of the IMF also, but apparently there has not been much progress. There are box items in the report which point to proposed tax revenue enhancement strategies, and the publication of a tax directory respectively. But the real achievement would be if the proposed strategies actually translate into action, and if the publication of a tax directory is followed by preparation of profiles of defaulters, and action against them.
The World Bank’s update was published before the placement of Pakistan’s sovereign bonds in international capital markets, but the Bank’s Chief Economist in Pakistan has generally been positive about the bond issue on social media. One view is that the $2 billion bond offering will enable the government to reduce interest on domestic debt, thus making a saving in the longer run. Nevertheless, the last time Pakistan entered the international bond market in 2007, its paper was priced at 325 basis points above the US Treasury bill rate. Seven years later, the interest on the bonds is 550 basis points higher, and Pakistan is rated lower in the international market than Greece, which is practically in default of international loans. The Bank’s Chief Economist has said (on the official Facebook page – can that be counted as an official statement one wonders?) that their internal models show that this debt is sustainable for Pakistan. The last time there was a huge bond offering, Pakistan was desperately borrowing from the IMF a year later. It would be great if the World Bank would publish its assessment of Pakistan’s debt sustainability.
[quote]The 3G auction is a feather in Ishaq Dar's cap, whether or not it met its revenue targets[/quote]
This government’s economic managers are certainly more active than the previous ones. The 3G auction is a feather in Mr Ishaq Dar’s cap, whether or not it met revenue targets. There appears to be a definite move towards privatization of some loss making state owned companies. But it is important to remember that at the end of the day, these are short term revenue enhancing measures. They may help plug the fiscal deficit for the current fiscal year, but in the long term, expenditure should ideally be funded by tax revenue, and imports by exports. Boosting production, improving tax collection and documentation of the economy, making regulation effective and getting prices right is absolutely essential, and no amount of privatization or auctioneering or for that matter bond issues can substitute for hard core policy reform. It would be good if donor agencies were to remind the government of that rather than issuing assessments based on superficial analysis.