Green shoots

A number of developments in the economy make a case that early signs of stability and turnaround may finally be in sight.

The economic conditions inherited by the government were undoubtedly challenging. However, they were compounded by the misconceived policies the government adopted for nearly a year. A sustained recovery from this state would require a major skillful effort. We examine the changes to ascertain whether the green shoots now visible will transform into a decent harvest of economic stability and prosperity.

The most auspicious signal is the successful completion of the first review under the IMF programme. Not only were all the performance criteria met, but with comfortable margins. Besides, there were five structural benchmarks to be completed by end-September. These included: (i) award of tracking system for cigarettes; (ii) notification of Nepra-determined tariff for FY2020; (iii) strategy plan for dealing with circular debt; (iv) SOEs plan delineating for each entity whether to retain or privatize; and (v) exit from the grey list of the FATF. It seems not all benchmarks were achieved as the press release says that work continues for completing the remaining benchmarks for end-September.

Perhaps the most reassuring aspect of the review is relating to the Fund’s assessment of progress on the FATF. The statement says: “Significant progress has been made in improving the AML/CFT framework, although additional work is needed before March 2020. International partners remain committed to supporting the authorities’ reform efforts, providing the necessary financing assurances”. This assessment is markedly different than the one that Pakistan received after the last Paris meeting. The assurance for continued financing support from IFIs would allay the apprehensions frequently voiced in the context of an adverse ruling from the FATF. With this assessment, our chances to come out clean have improved.

The Fund has underlined receding external account challenges (because of faster than expected reduction in the current account deficit), stability in the exchange rate, rising reserves, monetary policy’s success in fighting inflation (which has been revised downward to 11.8 percent from 13 percent earlier) and double-digit growth in tax revenues despite customs related shortfalls as the factors that point to a stable macroeconomic framework. The Fund has maintained its overall macroeconomic projection at the same level. This means that growth forecast of 2.4 percent is reaffirmed.

While the government would justifiably express satisfaction at this development, which provides a certificate of emerging stability and probable turnaround, a question that it cannot avoid is whether the slow pace of economic revival is in line with its promises to the electorate. Despite completing the first review with relative ease, continuing along the programme path would mean economic stability without any growth.

Growth during the Fund programme, as stipulated in the programme documents, would average at 3.3 percent, which was the rate of growth last year. It is not the brightest thing for a government to immerse in stabilization for four years and then hope there would be miraculous growth in its final year. Without focusing on growth today, one runs the risk that recessionary expectations would undermine stability and as falling production, rising unemployment and falling incomes put downward pressure on prices. Averting recession is occupying governments all across the globe, including as big and sturdy economy as that of India.

So what is the state of production and investment which may signal whether growth is going to resume anytime soon? We had previously noted the LSM decline. Since January, LSM production has fallen by 24 percent, which is reflective of major slow-down in production. The worrying data relates to petroleum sales and consumption. After dropping by nearly 25 percent last year, the sales of diesel and furnace oil, during Jul-Oct, were down by 14 percent and 16 percent, respectively, with a small pick-up of 4 percent in petrol.

A glimmer of hope was seen in month-on-month increase in consumption between October and September. The import compression has squeezed numerous industries from iron and steel to cement, beverages to food, electronics to chemicals, textiles to pharmaceuticals whose production has declined.

On the investment side, there is not much to report. The credit to the private sector continues to remain negative for nearly four months of the fiscal year. But more importantly, the money growth (M2) was virtually zero. With credit not flowing to private sector and money growth being zero, both investment and consumption demand would remain muted and hence growth prospects would remain dampened. This brings us to the question of policy rate. It should be expected that a 1.2 percentage point reduction in the IMF forecast for inflation would enable the next MPC to revise downward policy rate. If this happens, it would be a major growth signal.

Evidently, October saw subsiding price pressures, but the price environment remains fragile. Core inflation has declined significantly, from 8.4 percent to 7.7 percent, but food inflation remains elevated at 13.7 percent. This is a phenomenal burden on ordinary people. Of late, one has seen a few meetings presided by the prime minister regarding administrative measures to ward-off profiteering under conditions of supply shortages. However, a sustained effort to monitor the price situation throughout the country, with active participation of provincial governments, and to take corrective measures to remove supply constraints, is conspicuously missing.

It is difficult to recall from the recent past as alarming a price situation as we are facing today. It has mixed with other demand-cutting measures such as taxation, devaluation, interest rate hike and production cuts leading to loss of jobs, and thus created a combustible environment which could engender large-scale discontent in urban areas.

The government would do itself a great favour by making it mandatory for a national price monitoring committee to be held monthly and its decisions implemented expeditiously without fail.

The writer is a former finance secretary. Email: waqarmkn@gmail.com