Are We Ready To Grow – Dr Ashfaque H Khan

While governments in developing countries often tend to exaggerate economic performance for political reasons, it is the duty of professional economists to not only apprise readers about the true state of the economy but also point out the consequences of the governments’ policies for the economy. This article tries to do exactly that.

It is true that, when compared with the last five years (2008-12), the air of uncertainty surrounding the economy appears to be dissipating. The downslide that continued in the last five years also appears to have been arrested. What is required at this moment is patience, perseverance and dedication to a continuous improvement. There is no shortcut to sound fiscal and monetary policy to revive the economy.

This article dwells upon large-scale manufacturing statistics, the overall GDP growth rate, the pitfalls of exchange rate appreciation and Pakistan achieving the rank of 18th largest economy in the world by 2050. After growing at an average rate of 11 percent per annum during 2000-07, large-scale manufacturing slowed to an average of one percent per annum during 2008-12.

Many factors contributed to bringing the wheels of industries to a near standstill during the period. These include the deterioration of the security environment in the country, worsening of the law and order situation in the major growth poles of the country, mismanagement of the energy sector in general and the power sector in particular, the economy remaining off the government’s radar, a weak economic team, inconsistent policies, persistent political instability, the global economic meltdown and, most importantly, rapid weakening of the writ of the state.

With the change in government in June 2013, some of the factors that caused sharp deceleration in industrial growth appear to be improving. There are indications that large-scale manufacturing is exhibiting some signs of activity compared with the last five years. With this, the government appears to be losing patience and indulging in number manipulation to show sudden and massive improvement in industrial production.

There is no point in doing that. Except for the months of September and December, in which large-scale manufacturing exhibited extraordinary performance (11.1 percent and 13.2 percent respectively), the growth in this sector has averaged 3.6 percent during July-January 2013-14. Statistics for the months of September and December appear to be cooked and need to be re-looked. These fictitious numbers have already become part of large-scale manufacturing and will inflate its growth with serious implications for real GDP growth.

The Bureau of Statistics will use the July-February 2013-14 statistics of large-scale manufacturing to prepare national accounts for the year. If statistics pertaining to these two months are not rectified, a growth of 5.5 percent for July-February may be used for this sector, which may inflate the real GDP growth. Inflated manufacturing growth may also inflate value added in wholesale and retail trade.

Without manipulation, the real GDP growth would most probably be in the neighbourhood of 3.5-4.0 percent for the year 2013-14. If manipulated, the fictitious industrial growth and downward adjustment of last year’s real GDP (to reduce the base) would take growth in the range of 4.0-4.5 percent, consistent with the ‘desire’ of the political leadership. This is what the Bureau of Statistics is most likely to deliver.

Turning to the appreciation of exchange rate, the country witnessed a sudden inflow of $1.5 billion into an unknown fund – the Pakistan Development Fund, causing rampage in the exchange market. Inflows along with market manipulation caused appreciation of rupee by 7 percent in ten days. The finance minister asked the people to celebrate the appreciation of the rupee. While many people may have celebrated (the Textile Mills Association) and appreciated (the IMF), I would like to present the cost to the economy that this policy would inflict in the months to come.

Is the Pakistani rupee correctly valued today? My calculation suggests that as a result of recent appreciation, the real effective exchange rate has appreciated by nine percent over the last one year. Today, the exchange rate is around Rs98 per dollar and the SBP’s forex reserves are slightly less than $5 billion. The last time the exchange rate was at Rs98 per dollar was when the SBP’s forex reserves were at $8 billion. The last time the SBP’s forex reserves were slightly less than $5 billion, the country’s exchange rate was Rs106 per dollar. Hence, today’s exchange rate and the SBP’s reserves are inconsistent with each other and clearly suggest that Pakistan’s exchange rate has become overvalued as a result of the recent rupee appreciation.

Pakistan’s exchange rate has not only become overvalued but it has also lost its competitiveness viz its major competitors in the US and European markets. For example, the Pakistani rupee appreciated by eight percent viz India, 12 percent against Indonesia, 16 percent against Turkey and 5 percent against Thailand. Can Pakistan compete with these countries in the US and European markets with the new exchange rate?

Pakistan received GSP Plus status from the European Union with effect from January 1, 2014. The GSP Plus status has provided Pakistan a level-playing field to compete with regional competitors in the European Union market. Prior to getting this status, Pakistan was in a disadvantageous position viz its regional competitors to the extent of over 7 percent in duty. Now, the 7 percent appreciation of rupee has neutralised the gain that Pakistan received in terms of the GSP Plus status. Should we celebrate the appreciation of the rupee or should we celebrate receiving the GSP Plus status?

The country’s exchange rate was stabilised at Rs105-106 per dollar. Both exporters and importers had adjusted to this exchange rate which also encouraged expatriate Pakistanis to send more remittances. The new exchange rate has injected an element of uncertainty and, accordingly, the private sector is postponing business decisions. They are of the view that this level of exchange rate is unsustainable and the rupee will soon find its equilibrium value. Such uncertainty is not good for the economy. We may see its negative fallout in the flows of remittances as well as in the FBR’s revenues, going forward.

Jim O’Neill has talked about Pakistan emerging as the 18th largest economy in the world by 2050. He has coined the term BRIC (Brazil, Russia, India, China) in 2000 and now he has talked about MINT (Mexico, Indonesia, Nigeria, Turkey), emerging as dominant players in the world economy. According to his calculation, Pakistan has the potential to emerge as the 18th largest economy in the world by 2050.

Our political leadership once again became overzealous and argued that Pakistan wanted to achieve this rank by 2025 instead of 2050. While I sympathise with our leadership, I would like to point out that the Netherlands is currently ranked as the 18th largest economy whose GDP is 3.5 times that of Pakistan. The Netherlands is likely to grow at an average rate of 2 percent per annum. If Pakistan has to de-throw Netherland from this status, its economy must grow at an average rate of 12.5 percent per annum in real term till 2025. Are we ready to grow that fast?