A SLEW of numbers in the past few days got a few people excited that the economy has turned the corner and now lay on the path of growth. Among these people was the prime minister himself, who told his audience in Gilgit-Baltistan that the economy is now “on the right track” and he will redouble his energy towards ensuring “accountability”.
More current data on the state of industrial output in the month of October is still awaited, but in the meantime a leading cement magnate appeared on air and listed a number of data points that show an uptick in the pace of industrial activity. Cement despatches were rising, he said, both for domestic consumption as well as for exports. In addition, allied industries like paints, steel, household fixtures, tiles and so on were also seeing a large uptick he said. The numbers are supported by other data releases that show factory activity picking up, such as cars and motorbikes.
The data on industrial output was supported by a string of corporate results announcements in the month of October that showed profitability returning to listed companies. By one estimate put out by a leading brokerage firm, companies in the KSE 100 Index reported profits surged by 51.6 per cent in the period July to September 2020, compared to the preceding three months that were spent largely in the doldrums because of the lockdowns.
So in September, they crowed about the current account surplus to argue that the economy has been stabilised. In October, they are getting ready to celebrate an uptick in the pace of industrial activity to argue that the “economy is on the right track” and good times are returning. And for a brief moment, they can even make it seem like all this is true.
Usually when all is well the Fund is not the place where governments go.
But let’s ask a simple question. If the economy is “on the right track”, the external deficit has been eliminated and reserves are relatively stable, why is the government actively engaged in talks with the IMF? Usually when all is well the Fund is not the place where governments go.
Fact of the matter is that all the improvements in corporate profitability and pace of industrial output are fleeting phenomena that come and go in our economy, usually as the result of active inducements from the government. Flip through the headlines of the past decade, and you will find numerous months in 2012, for example, where the government touted a current account surplus as one of its big achievements.
“[W]e have succeeded in achieving economic stabilisation and are now confident that growth will soon resume to its potential,” finance adviser Hafeez Shaikh declared during his budget speech in June 2012. “At the outset, let me state that Pakistan has a stable macroeconomic framework. We have maintained a stable external position which we have managed in the absence of IMF disbursement during the last two years. We have returned $1.2 billion in loans from the IMF. Yet we have adequate reserves, our exchange rate is relatively stable, our exports have again performed remarkably well and our remittances are increasing.”
Notice how closely the language resembles the way they tout their achievements today. Even the person doing the touting is the same. But sadly, the year after these words were spoken, in the very year when the current account had been stabilised and the country had run one of the biggest monthly current account surpluses (larger in fact than the one they have just registered), the country was once again preparing for its 12th approach to the IMF for emergency support.
It’s the same with indicators that show an uptick in the pace of factory output. Given state-led inducement — subsidised interest rates, power and fuel coupled with tax and duty exemptions — factory output can pick up quickly. If you think the profits and output being touted these days are impressive, take a look at the data from the period of Ishaq Dar for comparison. Those manufacturing outputs were larger and purchased at a smaller cost to the exchequer, but they were fleeting and disappeared as soon as the deficits they gave birth to — fiscal and external — became unmanageable.
The question today is not how much factory output has increased by. The question is what has changed in the underlying economy to make this uptick sustainable. Have we seen any improvements in competitiveness, or reforms in the power sector, or broadening of the tax base, to take just three examples that come readily to mind? If the answer is no, than raw output increases driven by large government-subsidised inducements are little more than a transfer of public resources into the pockets of the rich. Massive schemes for such transfers are frequently seen under military governments in the past, mainly to buy the support of the rentier elite that rules our economy, but in these years we have seen democratic governments also begin resorting to the same tactics.
The problem is, there is an impending IMF programme, which is likely to put an end to much of the largesse that underlies the nascent dynamism underway in the economy. After that, the political difficulties settling upon the government threaten to absorb its energies and focus, which could raise the transaction costs of continuing down the present course.
But above all, the newfound uptick in industrial activity is matched by an equal, if not larger, slump in agriculture. First we saw the massive disruption of food supplies, leading to inflation which drove imports which in turn weighed on the reserves. Now we’re seeing a looming cotton crop failure, necessitating further resort to imports to keep the textile exports going. The opposing fortunes of industry and agriculture point most directly to the fact that this uptick owes itself to targeted inducements rather than some sort of an organic revival of the economy. And as such, it cannot last without throwing the macroeconomic stability off balance once again.
The writer is a member of staff.
Published in Dawn, November 5th, 2020