Anjum Ibrahim

The State Bank of Pakistan (SBP) has released its first quarterly 2020-21 report (July-September). Much has been written on SBP’s growth projection being higher than the World Bank projection by one to 2 percentage points (each percentage point amounting to 448 billion rupees) and 0.5 to 1.5 percentage point higher than the International Monetary Fund (IMF) projection though it would be fair to assume that the Fund will update that statistic after the ongoing negotiations are concluded – successfully or otherwise.

The report starts on a positive note: “Pakistan economy started to regain its pre-Covid trajectory in the first quarter of FY2021 (July-September). There was a notable pick-up in economic activity, as large scale manufacturing (LSM) gained traction, demand indicators recorded encouraging growth, exceeded their respective production targets.” The pre-Covid trajectory highlighted in the accompanying Table showed negative 5.5 percent LSM July-September 2019 however while one can overlook a politician zeroing in on the positive 5 percent growth in July-September 2020 for comparison purposes one would have hoped the SBP’s qualified and experienced team had highlighted the negative 24.98 percent LSM during April-June 2020, an extremely low base which led to positive 5 percent growth rate during the first quarter of the current year. In addition, one would have expected the SBP staff to undertake a cost benefit analysis of the growth in LSM against the cost of fiscal and monetary incentives, including an amnesty scheme for the construction sector.

The report’s rationale for higher growth July-September 2020 is premised on ‘the growth in cement and food processing sectors’. This is inexplicable as cement dispatches in July rose by 4.65 percent compared to June 2020 but in August cement dispatches plummeted by 27.2 percent while, given this low base, the dispatches rose by 48.1 percent in September. Food, beverage and tobacco, with a weightage of 12.3 in manufacturing rose by 12.99 percent in the first quarter of 2020 compared to negative 8.99 percent in the comparable period of the year before with the Pakistan Bureau of Statistics (PBS) data indicating an increase only in wheat and grain milling by 87.65 (baffling given the rise in prices as well as reliance on imports), soft drinks (10.36) and starch (0.14).

SBP report relies heavily on Business Confidence Survey (BCS), labour market data collated from statistical bureaus of Punjab and Sindh (with no labour exchanges in the country this data remains highly suspect) and PBS to conclude that there was growth in employment during July-August 2020 as the “sentiment of the business community turned positive for the first time since February 2020.” Heavy reliance on an intangible like business confidence maybe misplaced and in this context it is relevant to note that the World Bank has abandoned its calculation of ease of doing business (which was also based on perceptions) as data showed that while Pakistan’s ease of doing business was improved dramatically business activity was plummeting (though sadly several members of the federal cabinet seem unaware of this fact). In addition the BCS questionnaire gives five options that would be rather a challenge for an educated and qualified staff member leave alone those engaged in manufacturing, construction, wholesale and retail sectors in Pakistan – the options being improved significantly, improved moderately, remained unchanged, deteriorated moderately and deteriorated significantly.

The severe contractionary monetary policies signed off by the SBP Governor with the IMF last year included: (i) an under-valued rupee, with the real effective exchange rate (REER) given as 93, 91.7 and 94.1 in July, August and September 2020 against 89.7, 92.6 and 94.3 in the comparable three months of 2019 as per the SBP website. SBP management claims that the REER cannot be measured against 100 to determine whether it is over or under valued and it is a long term concept, a claim not backed by previous SBP governors who have queried as to why then is the Bank continuing to calculate the REER; additionally the SBP has not indicated as to when it would deem it appropriate to calculate the REER.

And (ii) the high discount rate of 13.25 percent stifled growth and fuelled unemployment last year – a rate linked to the CPI as per the SBP Governor Dr Reza Baqir and applicable from July 2019 to March 2020. It is quite inexplicable that the SBP report claims that policy rate was 7 percent for 2020 though it admits that it was 13.25 percent in the first quarter of 2019 – the 13.25 percent rate easily verifiable was applicable for a couple of weeks less than the first three quarters of last year. The SBP has yet to provide any research paper that would justify linking the discount rate to CPI (before 2019 the discount rate was linked to core inflation with a 2006 research paper uploaded on the SBP website supporting this linkage as the CPI includes items that are not sensitive to a discount rate fluctuation). Today the discount rate is 7 percent, the CPI 8.8 percent and core inflation around 5.6 percent so an explanation is required as to what is the thinking behind the existing discount rate.

The SBP report notes that “timely measures taken by the SBP and the government, including a host of refinance schemes and concessionary packages, to mitigate the impacts of the Covid shock, prevented the economy from plunging into a deeper recession. In addition to this frequent meetings of the Monetary Policy Committee were held in the second half of FY20 to closely monitor the evolving situation and take necessary policy measures.” Notwithstanding these “timely measures” as noted in the report private sector credit did not pick up in July-September 2020 registering negative 1.1 percent growth against positive 2.9 percent last year and negative 1.8 percent in April-June 2020.

The SBP report further maintains that ‘owing mainly to food prices, national Consumer Price Index inflation remained on the high side’ - the high side defined as 8.8 percent in the first quarter of the current year compared to 8.4 percent during April-June 2020 (during the first wave of the pandemic). Last year, the SBP had added an entire section on market imperfections, including the existence of cartels, more commonly though inaccurately referred to as the mafia by the Prime Minister, that absolved it of any responsibility for the high rate of inflation - projected at 13 percent by the IMF at the start of the fiscal year and claimed at 10.7 percent by the SBP - a projection on the severe contractionary monetary and fiscal policies agreed with the Fund.

Exports rose by negative 7.2 percent last year, negative 24.4 percent April-June 2020 and negative 10.4 percent July-September 2020, SBP reserves rose from 12.1 billion dollars last year – the same amount as during April-June 2020 and 12.2 billion dollars in July-September 2020 though the report is silent on how much of the swap arrangements (debt) as well as borrowings contributed to these reserves though the SBP website does indicate about at least half. And the claim that “the government reverted to concessional borrowing sources during Q1 FY21 and achieved low average cost of borrowing for the third successive quarter” was not endorsed by the Ministry of Finance and the Business Recorder was informed that reliance was mainly on commercial borrowing during this period.

The only good news, a dramatic rise in remittances, is unlikely to be sustained the SBP report argues due to “risks from the outlook for the oil exporting GCC economies.”

To conclude, the report’s target audience appears to be government ministers particularly the prime minister and this must be a source of serious concern to all stakeholders as it compromises the SBP’s capacity to present a realistic outlook by accepting blame for its policies and instead of patting itself on the back identifying the path forward.