Dr Ashfaque H Khan
The budget speech of the finance minister is an important piece of document as it contains the government’s views on the challenges besetting the economy in the foregoing year, the response of the government in addressing these challenges, and the various policies under consideration for the next fiscal year. The budget speech covers all the above elements.
In his second budget speech, Finance Minister Abdul Hafeez Shaikh devoted considerable time in explaining the state of the economy that the present government had inherited in March 2008. In his view, the government inherited a fragile economy which was badly affected by a consumption boom, double-digit inflation since 2006, international reserves that had declined from $16 to $6 billion, a sharp decline in the value of money, and an acute balance-of-payment crisis. He then listed various “landmark” measures taken by the government to bring stability to the economy.
The finance minister and his team and the government at large seem to be suffering from collective psychosis. Anyone suffering from psychosis experiences a complete loss of contact with reality, which impairs the individual’s thought process, perception and judgment. The individual in such a state constructs what psychologists call “his own reality construct,” which is a paradigm or worldview that cannot be changed by things called evidence, facts, statistics, etc. Bertrand Russell called it a “cloud of comforting beliefs.”
The finance minister’s budget speech was full of contradictions. While he argued that the present government had inherited a fragile economy, his own ministry submitted a written statement to the IMF in November 2008 in which it praised the all-round the performance of the economy from 2000-01 to 2007-08. Let me quote from the document, which is available on the IMF website.
“In the last decade, Pakistan’s economy witnessed a major transformation. The country’s real GDP increased from $60 billion in 2000-01 to $170 billion in 2007-08, with per-capita income rising from under $500 to over $1,000. During the same period, the volume of international trade increased from about $20 billion to nearly $60 billion. For most of this period, real GDP grew at more than seven percent a year with relative price stability. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current deficit and contributed to an increase in gross official reserves to $14.3 billion (3.8 months of imports) at end June 2007. Buoyant output growth, low inflation, and the government’s social policies contributed to a reduction in poverty and improvement in many social indicators.
“This strong macroeconomic performance resulted from the implementation of a series of important structural reforms… The macroeconomic situation, however, deteriorated significantly in 2007-08 and the first four months of 2008-09 owing to adverse security developments, large exogenous price shocks (oil and food), global financial turmoil, and policy inaction during the political transition to the new government.”
A simple comparison of these two statements reveals that either the minister or the government was facing a psychotic disorder or the speech was full of misstated facts and blatant lies to the people of Pakistan. It is high time that the minister, his team and the government chose one of these statements. Statements for local consumption to misguide the people of Pakistan and statements for international financial institutions should be the same. The minister disowns either the statement contained in the IMF document or the ones he presented to the National Assembly. Either the government has inherited a fragile economy or a robust economy as stated in the IMF document. Both the statements cannot be true.
Some facts regarding the state of the economy for the minister that his government inherited on March 31, 2008 are in order. Foreign-exchange reserves were $13.3 billion, the exchange rate stood at Rs62.76 per US dollar, the KSE index and market capitalisation were $15,125 and $73.7 billion, respectively, and inflation stood at 14.1 percent.
Foreign-exchange reserves declined to $6.8 billion in seven months. Inflation reached 25 percent in November 2008, the value of the rupee declined by 21 percent by Dec 31, 2008, food inflation jumped to over 30 percent in November 2008, from 21 percent in March, and non-food inflation surged from 9.4 percent in March 2008 to over 20 percent in November 2008.
Why did deterioration on such a large scale take place in such a short period of time? There are two reasons. First, the speed and the dimension of both domestic and external shocks were of extraordinary proportions. Second, the incoming government was initially inept at addressing economic challenges arising due to the domestic and external shocks. While the rest of the world was taking corrective measures and adjusting to higher food and fuel prices, Pakistan lurched from one crisis to another. Despite a peaceful election and smooth transition to a new government, political instability persisted. For protracted periods there were no finance, commerce, petroleum and health ministers in the country. The government lost six precious months in finding its feet. It gave the impression of having little sense of direction and purpose. A crisis of confidence intensified as investors and development partners started to walk away—the stock market nosedived, capital flight set in, foreign-exchange reserves plummeted and the rupee slumped in value by a third. Pakistan’s macroeconomic vulnerability had grown unbearable and it had no option but to return to the IMF for a bailout package.
The finance minister, who is an educated person, must remain a technocrat and avoid giving political statements.
The writer is principal and dean at NUST Business School in Islamabad, Email: email@example.com
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