Lessons Not Learnt

By Amir Zia
Money Matters
The News
Dec. 26, 2011

The SBP in its report has not offered any new diagnosis and prescription for the country’s economic woes. It has reiterated and reasserted what already remains known, but being one of the top regulators, the SBP’s observations carry weight which weighs hard on the government and its team of economic managers

The charge sheet of poor economic governance against the government has now become official with the release of the State Bank of Pakistan’s (SBP) annual report on the state of the country’s economy. Although the SBP’s report for fiscal 2010-11 has not revealed anything new, it summed up in detail the mismanagement and failures of the Pakistan Peoples’ Party (PPP)-led government in handling the country’s economy, putting an official seal to its verdict.
In these uncertain and volatile political times, when the government faces mounting overt and covert pressure from the opposition and a segment of state institutions to quit and call early elections, the SBP report proves yet another blow for this beleaguered setup, which appears battling for its survival.
All the red flags raised by independent economic experts and analysts about the government’s inaction on crucial policy matters, misjudged priorities and poor governance have been bunched together in the SBP report which paints an alarming picture of the state of the economy.
The continuing cycle of stagflation stems more from what the SBP calls ‘the structural deficiencies’ in Pakistan economy than any other factor. The irony is that the government has no strategy and political will to lead the country out of it.
The age-old fiscal problem, often described as the mother of all economic ills by experts, continues to haunt the economy as the government fails to expand the tax base despite repeated promises made to the International Monetary Fund (IMF) and local stakeholders. The imposition of the value-added tax (VAT), re-christened the reformed general sales tax (RGST), has now become a forgotten story. The government also has no plans to impose fair taxes on the grossly under-taxed sectors of the economy including agriculture and services.
The massive fiscal slippages on domestic debt and the crowding out of the private sector add to the economic woes, which are compounded by the acute power shortages. On the external front, Pakistan braces for tough times because of a possible slowdown in exports due to the recessionary economic trend in the United States and European Union.
Pakistan’s massive flow of workers' remittances, which allowed the country to achieve record high foreign exchange reserves earlier this year, could also take a hit in the coming years because of job losses in the recession-hit world economy.
The bigger concern should be the drying up of external inflows from international financial institutions which play a crucial role in slashing the country’s budget deficit. The gist of all these four inter-related factors of concern – highlighted countless times by a number of economists – have been summed up in one paragraph on the very first page of the SBP report.
The following pages of the report remain a chronicle of what the government failed to do pushing the country’s economy into a deeper hole.
‘The real issue is the government’s inability to implement fiscal reforms, and in some cases, not even being able to secure the required legislation,’ the report says.
The crucial decisions of the imposition of RGST, broadening of the tax net, phasing out of subsidies in a timely manner and restructuring the loss-making public sector enterprises were either delayed or not implemented, the report added.
Yes, it is the sad story of one failure after another. The Finance Ministry’s spin masters, including Finance Minister Abdul Hafeez Shaikh, must come out with an explanation for their inaction on crucial policy matters.
The SBP report devotes an entire chapter to the energy sector, highlighting the way the government mismanaged its affairs, starting from the controversial decision of bringing in rental power projects (RPPs) to that of the unnecessary delay in dealing with the problem of circular debt.
‘In our view, commissioning of RPPs to increase generation capacity was misplaced, as Pakistan is operating well below its installed capacity due to the circular debt problem,’ the report said.
‘In May 2011, the government disbursed Rs120 billion to Pepco in lieu of outstanding subsidy payments; however, this amount was not sufficient to resolve the issue conclusively, and total circular debt had reached to Rs251 billion by end-June 2011.’
The report says that in the final analysis, all the economic problems can be traced to poor governance. ‘Economic policies will be ineffective unless they are supported by strong institutions and are consistent with other government policies.’
‘A cross-country comparison shows that institutional weakness at all levels of government; the judiciary; civil service; law enforcement; regulatory bodies and agencies for oversight and accountability, are directly responsible for poor economic growth.’
No wonder that this situation has wrecked the business environment in Pakistan, where extremism and terrorism also work as a dampener and discourage both foreign and local investment.
According to a recent study by the World Bank on the ease of doing business, Pakistan has slipped to 105th position from 96th out of 183 countries evaluated.
As political polarization and tussle increases and the country wobbles from one crisis to another, the tidings for the economy remains bad.
The PPP government, which failed to carry out reforms in the earlier part of the term, hardly seems in a position to start the corrective measures now because it is locked in a battle for survival. The looming elections will also discourage the ruling party and its allies to initiate reforms. The longer political instability and uncertainty persist, worsen the economic situation would get. The country’s economic woes manifested through double digit inflation, low growth, growing unemployment and acute energy shortages will further fan social unrest and political turmoil. One crisis feeding the other, making economic recovery a much lengthier and more painful job for any set of present or future economic managers.
The SBP in its report has not offered any new diagnosis and prescription for the country’s economic woes. It has reiterated and reasserted what already remains known, but being one of the top regulators, the SBP’s observations carry weight which weighs hard on the government and its team of economic managers. However, the SBP’s warning shots are unlikely to change the ways of the government ñ at least for now.