Towards a stable economy?

Shahid Mehmood is not convinced by the narrative of the country’s economic managers

Towards a stable economy?
In case you’ve been out of touch with ground realities in Pakistan, like I seem to be, then here’s some news for you: the economy is now apparently ‘stable,’ and this stability has afforded an opportunity to the government to finally turn its gaze towards welfare of the people, and the country will now be motoring along the path of growth. Further proof of great things happening in the land of the pure comes from ‘donors’ and ‘rating agencies’ that have given thumbs up to the economic performance of the government.

Moreover, the current account deficit is down, exports have risen and of course, tomatoes are now selling for Rs17 per kilogramme! What else do we need as a sign of an economic turnaround?

What should one call it? Arrogance, or simply a matter of desperation to find some good news given that one and a half year have produced nothing but empty rhetoric and economic misery?

Let us be fair: the PTI government is not the first to resort to these kinds of tactics. The PML-N and the PPP were no better than the present lot when it came to economic management. Who can forget economic mismanagement under the PPP, or Ishaq Dar’s time-tested tactic of data fudging to make numbers look rosier than they were?

Here, let us quickly go through the numbers and the logic again in order to understand the ground realities. Why have the imports decreased? Record high taxes on imports, substantial decline in the relative value (exchange rate) of the rupee, compressed aggregate demand and significant erosion of buying power due to high inflation have naturally reduced the demand for imported items, which don’t come cheap. That lower economic growth lowered the demand for import should come as no surprise since higher GDP growth periods are always followed by higher imports (and vice versa).

Why have exports increased? First, a five or nine percent increase is of little significance. Second, there’s no breakthrough product that has come out of Pakistan that has started the uptick in exports. The answer probably lies in favours (like GSP Plus by EU and Chinese government’s significant lowering of tariffs on Pakistani imports).

There is an increase in remittances that surely must be a sign of confidence in the economy. Right? Wrong. Remittances from aboard sustain millions of families all over Pakistan. In the face of rising costs of living, remittances have to rise for maintaining a certain standard of living. That would explain the rise in the quantum of remittances.

What about the increase in investment? A large chunk of that investment is portfolio investment (also known as ‘hot money’). It is flowing to Pakistan chasing the central bank’s high interest rates, and will be withdrawn as soon State Bank starts lowering it, or there is an untoward event (border tension with India flares up).

But there are the ‘rating agencies,’ who have started to certify Pakistan as a stable economy? Surely they know better than us desi economists, don’t they? It is worthwhile delve into the merits of agencies and their ratings to understand that it is nothing to get cheery about. A good or improved rating by a rating agency does nothing for a country except that it signals the country as a good contender for taking on more debt (and vice versa). Put another way, with an improved rating, the real message goes out to the creditors that are always on the lookout to dish out more debt. Those who believe that good ratings are something to cheer about are, unfortunately, devoid of the intricacies that command the global flows of financial capital. As I mentioned above, the PTI is not the first one to allude to this chimera as cause of joy. Ishaq Dar was a good exploiter of such propaganda.

Lest we forget, just before the global economy almost collapsed due to the great recession of 2008, these same rating agencies had rated Lehman Brothers and Bear Stearns (two investment banks) as top notch and stable. But these two went bankrupt within days, starting off a chain reaction that has had severe ramifications for many countries. Need I say more about ‘ratings’?

My own impression is that these institutions and organizations tend to act as cheerleaders when a country is in a comparatively comfortable position to return borrowed money. But as soon as they feel that things are not going according to their recipes, they raise the red flag. My advice to the PTI would be to remain very careful of them rather than churlishly cheering at their praises.

What will the efforts towards ‘stability’ bring in the end? We have one very good example in front of us in the 1990s, when the IMF led ‘Structural Adjustment’ worsened the socioeconomic indicators of Pakistan. I, for once, do not doubt that this episode towards stability, supported by the IMF and others, will result in the same degradation of socioeconomic conditions. In fact, as the readers can themselves bear witness, the people are already bearing the brunt of stability. Within a year, the cost of maintaining a respectable livelihood has shot through the rooftop. Just a few days ago, the cost of electricity was increased for the fourth time since January! Not only has the cost of living become much dearer, but the cost of production has also increased considerably. For a country whose industry is struggling, this cannot be good news by any account.

It confounds me to no end as to what ‘stability’ have we achieved? The PTI, like the previous governments, has been a miserable failure at understanding the raison d’ etre of economic management: increasing the citizens’ quality of life. To most Pakistanis, for example, it is of little solace that stock market has received investment since not even one percent invest in it. It is little consequence to most Pakistanis that someone came and signed MOUs of $20 billion, or whether millions of dollars have arrived in portfolio investment. Neither have the MOUs materialized into real investment and nor was factory set up that can create jobs. Portfolio money is not brick and mortar investment, but is only here due to high interest rates, which ironically have made it difficult for investors at home to borrow.

What ‘stabilization’ has done till now is that it has lowered our quality of life. I am not buying into such stabilization mantra. Are you?

The writer is an economist

The writer is an economist. He tweets at @ShahidMohmand79