The trumpet of growth By Khurram Husain

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IT’S always the same story, regardless of the government in power. They enter, there is a crisis, they go to the IMF, a painful adjustment follows in which the rupee is devalued, interest rates are raised, growth plummets, and a rain of taxes falls upon the people. This continues for a couple of years by when the government has been skewered and raked over the coals by the opposition for its anti-people policies. Once stability returns, the fiscal and current account deficits shrink and reserves climb, the government in power spends its way back to growth in its thirst to show some tangible results. This causes the deficits to return, the reserves to fall, and brings the country back to the IMF, but by then the government is gone and another one is in power.

This cycle has repeated itself for over 30 years now, with some minor differences between one cycle and the next. For example, the regime of Gen Musharraf managed to ride the growth spurt for a few years more than most, mainly because he was showered with dollars in massive quantities from abroad as his reward for cooperating with the Americans and their war in Afghanistan. His team denied all along that foreign funds had anything to do with their growth story. They preferred to cast it as the fruits of their own labours, saying it was underwritten by their reforms.

 

In some cases growth has been accompanied by inflation, but in others it has not. Some growth cycles have impacted the rural areas and the agricultural economy more than the urban, industrial one. Some have been spurred by large government spending on massive infrastructure projects, financed through the development budget or via FDI as the CPEC inflows were classified, while others have utilised government resources through other means to spur growth.

But it never fails. A few years’ worth of an adjustment is all anybody can take over here and as soon as the deficits are curbed and reserves have risen, they want to get on with the business of spending it all away. This is why our growth spurts are always short-lived. It is also why they always end in a crash.

This same story is repeating itself one more time as the government and its minions get busy with extolling the return of growth. Never mind disputing the four per cent figure they have projected for GDP growth for this fiscal year. We can dispute government data all we want, but at the end of the day that is all we have to work with. Besides there is plenty of corroboration from industry that the wheels of the economy have begun to move again and are gathering speed.

But the wheels of the economy are not the only thing spinning these days. The return of growth is being hailed by the government in triumphalist tones that are almost identical to those used by everybody before them. In some cases, a few among their ranks are seen going overboard. One particularly committed soul with close ties to the prime minister was seen congratulating everyone on social media on the growth in banking-sector deposits, taking the dance of growth to absurd levels.

But the past has taught us a few lessons about how to view economic growth in Pakistan. First among these lessons is to never — ever — buy a growth story that is unaccompanied by reforms. And reforms does not mean incentive packages. They mean broadening the tax base and export base, increases in productivity, improvement in the regulatory environment and such deeper adjustments to the underpinnings of the economy.

 

This government has no reform story. None whatsoever. They have started down one road and abandoned it to start down another. Remember the base broadening initiative by Shabbar Zaidi? Where does all that effort stand today? What reforms have been brought in the power sector? The amendments to the State Bank Act lie dead in the water with nobody to champion them anymore.

Fact is this growth spurt is nothing more than the effects of a massive stimulus that the government administered to the economy around summer of last year. All governments administered a stimulus to boost their economies during the Covid months, but in many of those the effect of the stimulus was diluted by the aggressive mitigation measures they were forced to take as pandemic-related fatalities were mounting.

The size of the stimulus can be debated. The interest rate cut alone, for example, gave a stimulus equal to 5pc of GDP, which is larger than anything I can remember. Add up to this all the other measures via government spending and other SBP actions, and you are talking of an unprecedented boost given by government to the economy in Pakistan’s recent history. It is not very surprising that it has given us 4pc growth so far with more to come.

The question to always ask when this sort of thing happens is “can it last?” Usually whenever growth begins the vulnerabilities that will swamp it down the road start appearing at the same time. You see it this time too. The government tells you exports have risen more than 11pc in the months running from January to March. But you won’t hear them tell you that the trade deficit in the same period has risen by 29pc. They will argue some of this increase is one-off due to imports of food in December. But all signs at the moment are pointing towards a rising trade deficit since almost all raw materials used in our industry are imported, with a few important exceptions like cotton, which had to be imported this year due to a crop failure.

I have said it before and it bears repeating. Investment without savings, expenditures without revenues are like a drug for any economy. What we are seeing today is not growth as much as the rush that comes with the injection of a stimulant.