The dismal science, anyone?
Nuggets economists are talking about at the few parties they
are invited to
SHAHAB JAFRYIt is ironic that the rupee has sunk to its lowest against the dollar just when the reserve currency is hovering around its own long-term weakest level against its most traded partners. Last month’s sudden dollar bulge owed to greater Euro weakness across the Atlantic, not slow signs of growth in the US economy. The rupee’s drop is indicative of the market pricing in authorities’ inability to get a handle on red-light deficits and subsequent investor flight. The situation is made worse because the energy deprived, credit choked and investor denied economy lacks necessary capacity to leverage weak currency environment and bid up exports, the reason not just being growth slowdown in most traditional export markets.
No juice, no cocktail
Perhaps traditional budget time lament over neglect accorded to manufacturing and industry is unfounded, and whosoever climbs atop the finance ministry realizes rather quickly how futile expansionist adventures in industry are likely to be considering the country’s present energy situation. This means our export basket will continue to compromise on value addition, the lifeblood of 21st century market penetration. That in turn implies that the only possible advantage of weak fundamentals causing weakness in currency – increased exports – is also lost. So Dr Sheikh will approach this year’s budget presentation pretty much like last year’s, shrugging his shoulders whenever the question of missing set targets comes up, which is pretty often.
He knows better than most that without energy, no plausible strategic mix can be engineered. Earnings will definitely remain inadequate, especially since tax collection is still miniscule.
Timely official responses, especially of the preemptive nature, have known to help another area where Islamabad has set little precedent to boast. If homegrown problems of circular debt, corruption and line losses that have killed electricity and gas supply are not bad enough, the exogenous oil price shock is worse, adding to overall inflation at a time when productivity, employment and earning are already low.
Oil trauma and helplessness
Few Pakistanis, even at the enterprise level, really understand the subtle nature of our reliance on imported fuel, especially in complicated times like the present. Even pundits familiar with oil market dynamics were surprised by the recent surge in brent crude, and spill over headlines in the local press.
Oil remains high, despite clearly bearish fundamentals in the international demand and supply wet (physical delivery) market. America’s weak stabilization is offset by an imminent hard landing in China, industrial slowdown in India and the realization that emerging markets are not leading any coordinated bottoming out. Yet brent is bullish, a testament to the geopolitical premium of war clouds gathering over Iran. Should worsening dynamics impact the strategic Strait of Hormuz, oil will climb 40-50 dollars per barrel in minutes, leaving weak economies like Pakistan’s victim to international shockwaves they have no control over. If oil does not recede soon, price pressure will combine with high unemployment to keep consumer activity depressed, further squeezing the 4th quarter GDP number.
Of course, balance of payments!
To the comatose rupee and revenue paralysis add aid rollback and investor/producer flight, and you have serious memory problems if the BoP crisis of ’08 hasn’t already set off alarm bells in your mind. The IMF payment due shortly will traumatise the exchequer. Wriggling to avoid this axe would be difficult in the best of times. But for a government in election year, besieged by existential threats from the country’s most potent institutions, mired in a security nightmare stemming from the war against terrorism, in an era when popular public mobilisation has seriously upset the fate of nations, survival itself would be an achievement. And the key lies in improving the economy whose biggest concern at the moment is the simplest cost-revenue equation.
Prudence dictates that blocking leakages is not the central part of easing a fiscal chokehold, yet it is an important one. Unnecessary losses must be checked, but it is more important to posture dynamically. Progressive growth must be the bedrock of a bottoming out strategy. Fiscal and monetary policies must accommodate targeted expansion. It is the State Bank’s printing presses and interest rates, and the finance ministry’s expansion/ contraction plans that provide the litmus test for policymakers’ long-term direction, and competence.
Unfortunately, there is little to suggest current strains will ease anytime soon. Unless PhDs in the planning commission and finance ministry have worked long and hard on a surprise election-year, economic novelty, employment, inflation and invest are all set to continue disappointing.
The stuff of policies
In theory at least, policies and subsequent program dispersal can at best reflect and pursue specifics of employed models. If we are to ride free market forces to greater integration with financial markets, then the centre must immediately drop dead wood, loss making entities and hand them over to restructuring forces of the market. And if we must tailor our own homegrown model where the state must play the guiding role, an action plan of much greater magnitude, and impact, is needed. Either way, the present four billion annual loss from public sector entities cannot be sustained. Something must be done before something gives way.
Subsequently, at the risk of repetition, fixing holes can at best only come second to reviving productive enterprise. And this is where institutions have failed the worst. The state bank’s strange handling of monetary policy, and stranger rolling of heads, is as poor a reflection of government’s strategy as of its supposed independence. First, when interest rates were high, it failed to prevent excessive government borrowing, diluting the tight monetary policy and feeding high inflation. Then when rates were lowered, it again caved into government borrowing demands, and crowded crucial private sector investment out of the market, the proverbial kiss of death in low growth, high unemployment cases.
What banks could have done, should have done
When investment dries, no new employment is generated, and consumer spending slows down, eventually grinding the economy to a halt. In such times, the private sector’s life support is supposed to come from liquid credit market ensured by the commercial banking network.
Yet with government presence so overwhelming in the money market, banks have little incentive to indulge in risk management embarrassment of engaging in their core business of lending to productive enterprise.
Simply put, the only liquidity being generated is from the printing presses of the state bank, and that too to finance government borrowing to record, unsustainable levels. Again, employment is chronically low and the economy stagnant, so printing more money will only mean higher inflation in the medium to long term. As election draws near, inflation alone can influence polls, especially when erratic energy prices are causing price rises across the board.
Election gambit
Will the government avoid upsetting party loyalists swelling unproductive ranks of public companies, or will it bite the bullet and trim excess to kick off election season? Will Islamabad continue pressuring monetary outlets for more money, or will it let private sector investment attempt to stimulate some life back into the economy? It’s a difficult mix to juggle.
And all the while masters of our fate decide how to momentarily watch our interests in order to safeguard theirs for much longer, the rupee’s unrelenting nosedive continues, energy remains a rare commodity and deficits tread deeper into red. If the government really has a rabbit to pull out of the hat, it must spring it soon, and its genius must first address the economy.
