Guest post by A.H.Kalwar of Pakistion Blog
With the current account deficit widening, inflation boiling at over 24% and foreign reserves dieing out at the rate of $1 billion a month. Pakistan’s economic indicators seem to have taken a nose dive. Where did it start and when will it end?
The dollar today stands at over Rs.80 in the open market. Citigroup calls weak rupee ‘a legacy of flawed economic policies’. Economic policies put in place by a generous gift to Pakistan, from Citigroup itself, the MBA-cum-economist Mr.Shaukat Aziz. The other Shaukat, Tareen our latest in the line of Finance ministers boldly throws all the blame on the previous government and it’s “Short-term” aimed policies.
So how the hell did we land up here?, is Zardari secretly stealing all those billions from our foreign reserves? no. I mean I’m sure he’s tempted to, but well that’s not how it works. People frequently ask me how everything went wrong after the PPP-led government took office. The answer to that is, it didn’t go wrong after the new government took office. It went wrong a year before that. When it was obvious to the Chuadries of Gujrat that they’d soon have to vacant government offices they didn’t like it.
The Hidden, and fairly obvious motives.
November 2007; I turn on my TV and a local economist on CNBC is trying to explain to the host the sinister intentions of Musharraf and his minions. Global oil prices have jumped up by almost $20 to $86/barrel in a span of 2 months, domestic prices world over are adjusted accordingly yet prices in Pakistan remain static. The government is providing an subsidy of almost Rs.40 per liter of petrol. Now multiply 40 by the number of liters of petrol sold in 24 hours across Pakistan, that’s the amount of money the government was paying Pak-Arab Refinery daily. Now all of this may seem good for the average automobile/factory owner, and it was in the short-short-term, but that wasn’t what Musharraf was aiming for, he’s smarter than that. The basic motive behind this was political gain, if they could just hold up five more months, the “Petrol ke keemtain bara dee” blame could be thrown on the new government which would either be PPP-led or PMLN-led.
While most people did not release why this was of any concern economists knew exactly where this was headed. Amid worsening economic situation – one of the reasons given for imposition of emergency on Nov 3rd 2007 – this was a deliberate blow to the long-awaited stability Musharraf had gained and was ready to throw down the drain owing to typical politics.
Here’s are excerpts from:
ISLAMABAD (December 12 2007): President Pervez Musharraf has rejected any change in petroleum products’ pricing policy, leaving no other option for the caretaker government to absorb billions of rupees more as subsidy every month for protecting the consumers from international market price-hike.
A senior official told Business Recorder on Tuesday that after President’s ‘No’ to any change in existing policy there was no possibility of upward revision in oil prices for the next fortnight, commencing from December 16.
In the last couple of months of Shaukat Aziz regime, Oil and Gas Regulatory Authority (Ogra), Ministry of Petroleum and Finance made serious efforts to get the policy of capped oil prices changed but they could not succeed. Now in caretaker setup Ogra and related ministries again presented their case with a hope to get positive response but they met the same response of not passing the real prices to the consumers.
Now when crude oil prices are ranging between $90 and $100 per barrel, the government is absorbing on average Rs 14 billion every month as subsidy. Such a big hit is widening budgetary deficit and worrying the economic team of the caretaker government.
“Can the new elected government take the unpopular step to increase oil prices at the first available opportunity? Or will it allow the subsidy on oil prices to widen the budget deficit and to erode macro-economic stability the way the previous government and the caretakers did? It will be confronted with tough choices.“
These subsidies rose to about Rs 30 billion per month by the time the new government took charge. Domestic prices, static, the president had spoken.
This particular step by Musharraf virtually destroyed our economy, making billions for Pak-Arab refinery in the process. The federal reserves had declined by 37% before April 2008, our Petroleum Import bill had sky-rocketed. For the month of September our monthly import bill was $519.7m. By November it had increased to $939.4m and by the end of April it had reached $1458.8m (monthly), an increase of 280% within 7 months. Instead of cutting the demand, and substituting over to alternates, our nations consumption of oil gradually increased over this period. Opposite to what was happening world over.
Consequently our budget deficit had reached absurd digits, to finance the deficit the government literally printed notes. Below is an excerpt from State Bank of Pakistan’s latest report on Monetary policy:
More importantly, Government borrowing from the central bank was largely on track; as it borrowed only Rs23.2 billion. In short, major economic variables were showing that monetary transmission mechanism was working. However, since November 2007 onwards, monetary tightening began to lose some of its steam. Massive liquidity was injected in the system as the Government borrowed from SBP almost Rs178 billion in November and December 2007. This led to softening of key interest rates and money growth accelerated. At the same time, rising international oil and food prices impacted the inflation outlook and in absence of adjustment in domestic prices the financial burden of subsidies and high spending in other areas resulted in rising economic stress.
This heavy borrowing increased money supply which in-turn gave rise to the inflation and the castle of cards had started to fall, Investor’s got spooked and started withdrawing the dollars, pushing the economy into a downwards spiral. For those of you who do not know what a downwards spiral is, its when ‘Foreign reserves decline due to a reason of concern – in this case rising oil prices fueled by politics – people start withdrawing money from Pakistan, because they withdrew money foreign reserves went down further, again spooking more investors who also take out their money. This creates a cycle of declining foreign reserves”. As a consequence the rupee’s demand went down, increasing our cost of the dollar and in turn of a barrel of oil.
By now the Global economy has taken a sever hit, world over financial systems are collapsing (or have collapsed). While most developing countries dodged a more critical hit, Pakistan suffered because of its newly inflated Banking sector. Musharraf had actually taken focus off of agriculture – which showed a slow annul decline in his tenure – and manufacturing and pushed an infant economy onto a tertiary sector oriented growth.
Combined with global economic slowdown Pakistan’s near future does not look very promising, where countries like the U.S., France and Ireland can afford bail-out plans of more than half a trillion dollars each, I’m afraid we can-not do the same. While i am extremely negative on taking a loans from a U.S. based bank or fund, right now we do not have much choice.
From how i see it, if steered correctly Pakistan’s economy should be on rail by mid-2009 and blossoming in 2010. This is just a bump in our growth chart, it shall be over soon.