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IN the world of business, where I come from, a firm’s performance is evaluated in the context of the external environment. There are factors that are internal to a firm, which we term endogenous, and which can be controlled by management. And then there are factors that are external, like the economic or competitive environment, which, in our parlance, are termed exogenous.
So what are we to make of the PML-N government’s performance in office over the nearly three quarters of its term? The single largest factor that has worked in its favour has been the collapse of oil prices in mid-2014. Almost all the positive outcomes that the government today claims as its ‘achievements’ can be attributed to this one single event.
Does this sounds incredible? So why am I making this seemingly outrageous claim today? I am open to being challenged but let me first state my case.
To be sure, petroleum is our single largest import item and which, until the collapse, accounted for one-third of our total import bill and a whopping five per cent of our GDP. In one fell swoop, that item has been cut down to less than half.
This has brought about a drastic improvement in our balance of payments on external accounts, foreign currency reserves and exchange rate stability. We have been able to meet the IMF conditions without lifting a finger. We have been able to raise more debt on the global markets.
What PML-N claims as achievements can be attributed to the collapse in oil prices.
Both of these would not have been possible without the massive improvement on external account triggered by lower oil prices. A lower rate of inflation has also influenced interest rates which have fallen to a record low. For its part, the government has lost no revenue because it has escalated taxes and levies on petroleum imports and passed on only half the benefit.
When this government took over, the power sector was accumulating circular debt at the rate of one billion rupees a day. Difficult and painful reforms were needed that, especially with the removal of subsidies, would have been politically unpopular. Today, that is much less necessary. Fuel prices have declined to less than half anyway, and so has the rate of accumulation of circular debt. But has there been a visible improvement in the management and performance of the distribution companies?
Economics 101 tells us that every dollar reduced from the import bill increases GDP by one dollar. Therefore, the $7bn saved because of cheap oil adds three percentage points to GDP growth. The growth rate in the last two consecutive years has come in at just above four per cent. Most of this figure reflects the reduction in oil prices in world markets, not government or economic performance.
To be fair, there has also been a decline in overall commodity prices (notably cotton) and that has hit export revenues, but the argument here is that gains from petroleum imports are far higher than the losses from cotton exports — nearly double in fact.
And what of the PML-N’s own non performance, things it said it would do? In the areas of privatisation, power sector reform, tax collection and reform, civil service reform, improving export competitiveness, attracting foreign direct investment? Forget outcomes, are there even failed strategies they can show us saying ‘we tried’?
So were it not for the oil price collapse, what kind of scenario could we be imagining today? Twelve-hour blackouts, petrol shortages (remember last year when petrol pumps in Punjab ran out because PSO’s LC limits to import supplies had been crossed?), rupee-dollar parity at 150, inflation in double digits, a scramble to the debtors for rescheduling and more printing of money, and yet more inflation.
And for those who still disagree, I would suggest one of our economic think tanks run a simulation model of Pakistan’s economy changing only one parameter, oil price to $100 per barrel instead of the average $40 that we have been getting. And see where the economy would be today.
That exercise would only be for posterity though. Electoral constituencies are not impressed with hypothetical economic scenario building. For the common man, the recent reality has been lower electricity and petrol prices and transport fares. The stable rupee and lower inflation have left him with more purchasing power. Industry has similarly benefited from low energy prices and record low interest rates.
So what of the remaining one year and some months of this government’s term? With political will and capital nearly fizzled out by now, will we continue to see further improvement? Indeed. So sit back and enjoy the free ride.
The writer is author of the book Putting Pakistan Right: Standpoints on the War on Terror, Energy, Transit Corridors & Economic Development.
Published in Dawn September 11th, 2016
