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IN the opening sentence of its latest report, the State Bank says Pakistan’s economy “appears to have turned a corner during the 3rd quarter” of the last fiscal year. Let’s hope it didn’t lose a wheel in the course of doing so.
One place where the wheels look a bit shaky is the overall optimistic spin that the State Bank has tried to lace the report with. Business sentiments are up, we are told. The GDP growth rate is on the “rebound”, credit to the private sector is on the “rise”, the fiscal deficit is “contained”, inflation “subdued”, reserves are rising and the currency is stable. So what’s the problem?
Consider for instance, the case of the GDP growth rate, which the report proudly calls a “key development” of the last fiscal year. It has risen to 4.1pc, “the highest in five years”. But disaggregate the figure, as we used to say in Econ 100, and you’re left holding a plucked goose. The report is right to point out early that whatever growth there is, is “not broad based” and has come largely from construction and large scale manufacturing (LSM).
The truth behind the growth rate figure of 4.1pc is a lot less shiny than the State Bank report makes it out to be.
But you’ll have to read down to page 14 though, by when most readers would have scattered, to find this rather important sentence: “[q]uarterly data reveals a sharp decline in YoY growth of LSM during Q3-FY14”. In fact, whatever growth there was in industry, came crashing down quite fast midway through the fiscal year, from 6.5pc in the first half to 0.5pc in the third quarter. It’s strange how the report chooses to make excuses for this volatile state of affairs, rather than flagging it as evidence of a shallow recovery.
In addition, electricity and gas distribution have also made a large contribution to the growth rate, “mainly due to higher production in power generation companies following the settlement of circular debt in the earlier months of FY14”.
The truth behind the growth rate figure of 4.1pc, therefore, is a lot less shiny and laudatory than the report makes it out to be. In fact, the return of growth is built on very shaky foundations.
At the very heart of the positive assessment of the State Bank is the sharp improvement in the foreign exchange reserves from March onwards. The story of this improvement begins in March with a $1.5 billion “grant from a friendly country”, a phrase used so often in the report it begins to sound a little biblical, as if this is help from he-who-must-not-be-named.
In April, the taps were opened, with a $2bn Eurobond auction, and $536 million coming into State Bank reserves from the 3G auction. Then came “lumpy inflows” from the multilaterals, $400m from the Asian Development Bank in April and $1bn from the World Bank in May. Reserves jumped by $1.8bn in the third quarter of the fiscal year, after a long period of consistent declines. “Since late 2001, Pakistan has not experienced such a sequence of positive developments in the external sector,” says the report.
So what’s the problem? First: “[T]his improvement was driven mainly by the receipt of a bilateral grant of US$1.5 billion” from he-who-must-not-be-named. Second: “underlying fundamentals do not show much of an improvement” despite an increase in the foreign exchange reserves. Foreign direct investment “has still to pick up” and external trade shows “a sizable deficit”. Third, the debt repayment capacity of the country now has to be increased sharply “to avoid payment pressures when newly taken loans fall due”.
Besides the “grant from a friendly country”, the Eurobond auction has done a lot to bolster reserves. The government boasts that the auction was oversubscribed because investors have changed their perception of Pakistan. But the State Bank has this to say: “This strong response of the international market can be traced to the availability of funding and the high return that was offered by the government.”
Data given in the report show that not only are these the most expensive bonds floated by Pakistan in over a decade, they are also the most expensive in a list of seven other countries that issued bonds at the same time. The bonds raise important issues of debt sustainability for Pakistan, as the government increasingly shifts its borrowing away from domestic towards foreign sources.
After noting a consistent deterioration in Pakistan’s servicing capacity on its external debt since 2011, the authors remind the government that servicing on an additional $8bn of Paris Club debt is scheduled to resume in 2017 as per the terms of its rescheduling back in 2001. “[U]nless the country’s FX earnings improve significantly, the government should be conservative in raising funds from the international capital market.”
What a pity this advice is buried at the bottom of page 59, and not flagged upfront. You would think that questions related to debt sustainability and the health of the reserves would be close to the heart of the State Bank staff, but here you have to wade through the pathos to get to the meaningful parts of the report.
A closer look removes the shine from the GDP growth rate boasted by the government, as well as any “improvement” in the external sector. The GDP growth rate is largely due to contingent factors, like the retirement of the circular debt, earlier start to the sugar-crushing season, diversion of gas to the fertiliser sector which kick-started idle capacity, and so on. And the external sector has gained strength largely from “one off inflows”, or borrowed money, mostly on expensive terms.
My question is: what’s with the waxing optimism upfront in the report? Is it really that necessary for bank staff to pander to the sensitivities of their political masters?
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, July 17th, 2014
