Jarri Najam
Nov 6 · 8 min read

Rebuttal to Shahzeb Khanzada’s segment on the economy on Geo ASKKS (5th Nov 2019)

https://www.facebook.com/watch/?v=461476307811276

Shahzeb, congratulations for spinning it more than Warne and Murali.

All your focus is on objecting to why “a” was compared to “b” but not to “c” without going into whether a certain comparison even makes sense. You can’t find any fault in the numbers Hammad shared but you wanted him to do illogical comparisons like yourself to support your narrative that this govt has done worse than PPP and PMLN in their first 13 months.

Let me share some facts that bust your narrative and endorse what Hammad said. PTI inherited the largest ever Current Account Deficit in our history: $19.9 bn in FY18. PMLN inherited a CAD of just $2.5 bn in FY13. That is why there is ZERO logic in comparing anything between PTI’s first year and PMLN’s first year, something you wondered why Hammad didn’t do. It would be nonsensical. Larger CAD means larger adjustments are required and all indicators like growth, inflation, etc. will deteriorate MORE in the short term. This doesn’t prove PTI’s economic performance was bad, it only confirms the simple fact that PMLN left a BIGGER crisis than what they inherited. Actually, PMLN did not even inherit an economic crisis according to the IMF. See IMF press release from 2013:

https://www.imf.org/.../Art.../2015/09/28/04/53/socar090413a

“Countries normally borrow from the IMF when they have serious balance of payments difficulties. Pakistan is not yet in an economic crisis. The current account deficit of the balance of payments is actually relatively small by international standards — only around 1 percent of GDP”.

PTI, on the other hand, inherited the biggest BOP crisis in our history. Read this from an actual economist to have an idea:

https://www.dawn.com/news/1502555/challenging-the-cw

“In July 2018, at the beginning of fiscal year 2018–19, the situation with regards to the country’s external payments for the year ahead (the demand for dollars) was as follows:

The gross external financing requirement was around $27 billion. Predetermined short-term outflows (foreign exchange swaps, central bank liabilities) not included in the above total amounted to a further $7bn. Hence, the total demand for dollars for 2018–19 was circa $34bn. (It is important to realise this estimation of demand did not include the need to build foreign exchange reserves by at least a further $6bn to $8bn at the time.)
On the supply side, the foreign exchange reserves held by the SBP on July 1, 2018, amounted to $9.8bn. During the course of the year, this would likely be augmented by foreign exchange inflows from FDI and external loans, but the timing as well as magnitude of these remained highly uncertain without the IMF. Hence, as things stood for all practical purposes, there was an excess demand of over $24bn in the country’s exchange market.
Given the unprecedented size of the gap between the supply and demand of dollars, there should be no mystery why the rupee crashed when the SBP withdrew its support (because its foreign exchange reserves were depleting untenably).”

“A final point on the rupee to address the deliberate confusion being spread by those elements wishing to deflect criticism from the atrocious economic management of the PML-N, which was directly responsible for this crisis. The country’s foreign exchange reserves had already fallen from $16.1bn to $9.8bn in 2017–18 — before the PTI government took over. In fact, in July 2018, one month before the formation of the PTI government, there was a near-consensus in the financial markets that the rupee would fall to at least Rs180 to Rs200 per dollar. This is as clear an indication as any that the mess had already been created before the PTI government took over.”

Note that we don’t go to the IMF for reducing terrorism or power outages or to reduce the influence of judiciary or army, etc. so all your points about the problems PTI did NOT inherit are mostly irrelevant to the economy. Tough economic decisions necessitated by a BOP crisis are what result in higher inflation, lower growth, decline in real wages, higher interest payments, decrease in revenue, contraction in LSM, etc. in the short term. All these things were predicted way back in 2016 when the PMLN was still in power, hence all these are attributable to PMLN’s poor economic management:

https://www.thefridaytimes.com/fall-sick-with-the-healing/

“The resulting crisis will be similar to the one witnessed a few years ago during the PPP’s tenure. The government that comes to power after the 2018 elections will run higher budget deficits, leading to increase in the rate of inflation. Large infrastructure and public-sector development programs will have to be cut. And the SBP will be forced to increase interest rates to curb inflation. The ensuing economic slowdown will further constrain the government’s revenue capacity and add to the budgetary woes.

Given the rise in external debt, the run on the rupee will be larger than what has been witnessed in prior instances. To stabilize the value of the currency, the PML-N government has allowed it to remain overvalued — the IMF has raised this issue in successive reports. In a crisis where reserves are declining rapidly, the rupee will come under profound pressure, leading to a remarkable depreciation in a short period of time.
The general population will be burdened with rising prices, a stagnant economy, and a decline in real wages.”

You question why Hammad compared inflation in PTI’s first 13 months with PPP or PMLN’s first 13 months. The answer is simple: these parties are out on the streets protesting against inflation whereas their own governments had WORSE figures for inflation in the same time period. THAT is why he made the comparison. There is no logic in comparing inflation from a time period when adjustments were not underway (like FY18 under PMLN) to FY19 when adjustments were in full swing, including devaluation and tariff increases plus measures to control imports. Comparison can be made from one crisis to another, when adjustments were being undertaken. Despite the fact that PTI inherited a bigger crisis, the inflation under them is STILL lower.

Your comments on portfolio investment in local debt market show a serious lack of knowledge about how portfolio investments work. In Egypt, around $30 bn of hot money was attracted when their interest rates were at their peak and even after they reduced them by around 6%, that only went down to $23 bn. This shows you are criticizing the govt needlessly. If the economy stabilizes and interest rates go down, all portfolio investments won’t simply evaporate. The majority shall stay and that provides us a buffer on our external side which is much needed. Reza Baqir should be commended for convincing foreign investors to invest in Pakistan’s debt market, thereby deepening the market and making govt debt cheaper in the longer term by adding more competition.

You talked about why cement numbers were quoted for one month. Fyi, the overall numbers for July-Oct 2019 show an increase in both local dispatches and exports (4.53% combined) so this isn’t about one month only, it is a developing trend. There was a significant increase in Sep 2019 as well and that has continued in Oct 2019. The reason why cement is talked about is because it is a barometer of economic activity in the country. A recent uptick after the budget and IMF program means that the economic activity is now increasing. That was the purpose of quoting recent data. It would be pointless to compare this to FY14 or FY18 in the PMLN era because such a tough IMF program was never implemented then, nor was such an ambitious budget presented.

https://tribune.com.pk/.../2-cement-sales-hit-historic.../

Quoting cement numbers doesn’t mean other industries are all suffering; on the contrary. Heavily import dependent industries and those that rely on local consumption WILL suffer in the short term because that is the expected outcome of monetary and fiscal tightening plus CAD reduction policies. It is export oriented industries that will do well and new import substitution industries are coming up to meet local demand. This is by design. LSM index does not measure all industries, it takes a few sample industries and the majority of those are the ones which happen to be suffering in the current environment. You can have a look at textiles to see how the biggest export industry is doing. Hammad mentioned the figures for subsectors of textile because those are our major exports. I thought that should be obvious.

You are trying to spin everything positive into a negative by making illogical comparisons and omitting context. The economy is indeed stabilizing after the monumental crisis it was left in by PMLN with their unsustainable import led, consumption driven growth model which you harp on about. That is the cause of our ills, not something to gloat about. This govt is making structural reforms to change that to an export and investment led, domestic productivity based growth model so the next time we achieve high growth, it won’t be financed by widening deficits and artificial manipulation of exchange rate. As the IMF said in its staff report upon signing the program in 2019:

“Pakistan’s economy is at a critical juncture. Misaligned economic policies, including large fiscal deficits, loose monetary policy, and defense of an overvalued exchange rate, fueled consumption and short-term growth in recent years, but steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves. Structural weaknesses remained largely unaddressed, including a chronically weak tax administration, a difficult business environment, inefficient and loss making SOEs, and low labor productivity amid a large informal economy. Without urgent policy action, economic and financial stability could be at risk, and growth prospects will be insufficient to meet the needs of a rapidly growing population.”

First educate yourself and then educate your viewers. Presenting misleading comparisons might fool a few viewers but not investors who agree with the govt’s narrative of a stabilizing economy, which is why the stock market has turned a corner and has been the best performing since mid-August globally. The decline was due to the crisis PMLN created, you failed to mention that it had started back in May 2017 when KSE-100 index reached around 53k but then had fallen to around 42.5k when PTI took over. The fall under PTI was a continuation of that slide which was due to the same crisis and ensuing adjustments; now that trend has not only been arrested but REVERSED. This is what Hammad mentioned. And fyi, recovery from a crisis follows a typical sequence: the external account stabilizes first followed by the asset markets and finally, the real economy. We have already seen the first two steps of this sequence, the third is only a matter of time. Read this piece to have a better understanding:

https://www.dawn.com/news/1512801/pathways-to-growth

You talked about power issues being resolved but failed to mention the mountain of 1.1 trillion circular debt left by PMLN and massive capacity payments with the added power generation capacity that means higher tariffs. Cherry-picking to suit a certain narrative isn’t journalism.

https://www.brecorder.com/.../capacity-payments-nearing.../

“While the previous government must be credited for making energy available, it cannot be absolved of the criminal negligence on the affordability front. For the current fiscal year subsidies have been provided to cater for the tariff increase, but that will not be enough by the end of the year. And in the years to come, subsidizing electricity will only become tougher, with ever rising capacity payments. From where things are, Pakistan has to unfortunately settle for pricier power for the foreseeable future. One hopes there is a lesson for the policymakers when the next big round of power plant addition comes; the agreements are made with more economic sense, instead of falling head over heels just to have more power in the system.”

Basically, PTI govt is suffering the fallout of PMLN’s poor and ill-thought policies in virtually every sector. And then you have the gall to say that the current govt’s performance is not as good. Pathetic.