The Ishaq Dar-led Finance Ministry recently had occasion to crow – indicated by the dissemination of information through a press release as well as from the taxpayers funded official news agency and/or Press Information Department (PID) – about four news items:
(i) the stable rating B by Fitch, which Dar claimed was a confirmation of “the progress achieved by the present government under its economic reform agenda”; (ii) Bloomberg columnist Tyler Cowen’s article titled “Pakistan’s Economy is a Pleasant Surprise;” (iii) PriceWaterHouse and Cooper’s (PWC) favourable report (an accounting/audit firm); and (iv) Barron magazine’s article titled, Forget India the new big thing is right next door.
In no uncertain terms Dar rejects local columnists, however better qualified with more diverse experience they may have relative to those who write for the Western media, as at best being misinformed and, at worst, engaged in an anti-Pakistan propaganda for political point scoring that damages the country. The old school of Pakistani politicians – and Ishaq Dar epitomizes that group – has an inherent bias in favour of all things Western – including capacity for informed analysis, medical expertise, facilities, etc.
Be that as it may, one cannot and must not dismiss a stable rating by Fitch or indeed a favourable article in Bloomberg/Barron out of hand. But should we, the public, draw the same conclusions from the two news items as have been drawn by the Finance Minister from his rather selective quotes?
Before responding to this question it is relevant to note that international rating agencies/media/audit firms do not focus/consider massive data jugglery that has been repeatedly pointed out by local economists – a contention backed by the lack of rationalization of government data from different sources as well as the sustained resistance by the Federal Bureau of Statistics (FBS) to meet with and discuss data discrepancies with the independent media/domestic economists.
Finance Ministry’s press release highlighted all the positives that were contained in the Fitch report. However ignored was the statement that “Pakistan is underdeveloped relative to ‘B’-rated peers, with GDP per capita at US$ 1422 in FY15 compared with the ‘B’ median of US$ 3625. GDP growth over the past five years has averaged lower than peers despite the lower income level, constrained by a low investment rate and poor business environment.”
Fitch Ratings, as that of other rating agencies, are a reflection of the ability of a country to repay its loans. So a stable rating implies that the country’s capacity to repay loans has not been compromised. But there are many issues facing the country that were not cited in the official news agency or PID report: “Fitch considers external liquidity an ongoing vulnerability for Pakistan.
Despite a small current account deficit compared to peers (1% of GDP in the fiscal year to June 2015 (FY15) compared with ‘B’ median of 7.3%) and modest net external indebtedness. Net FDI inflows have averaged just 0.7% of GDP between 2010 and 2014, requiring Pakistan to access other forms of external financing, such as portfolio flows and multilateral support.
Fitch expects FDI inflows to increase substantially in the future as plans for US$ 46 billion worth of projects linked to the China-Pakistan Economic Corridor (CPEC) get underway. However, the extent the CPEC benefits the country’s external finances will depend on the exact terms of projects, particularly financing plans and the import intensity of investments. Slower remittance growth from oil producers in the Middle East could add pressure to external finances.”
The foregoing is precisely what is being consistently argued by local economists. Our reserves (Fitch terminology: external liquidity) remain under stress because they are supported by borrowing, the CPEC is a game changer but, most importantly, the benefit that would accrue to the nation would depend on “exact terms of the projects and the import intensity of investments” – factors that remain shrouded in mystery.
And lastly, Fitch maintains correctly that “the ability of the Pakistan government to sustain structural improvements and maintain macroeconomic stability after the IMF programme is completed, due in September 2016, will be an important rating driver. The implementation of politically unpopular reforms could become more challenging in the run-up to the general election, expected in 2018”.
Bloomberg columnist, not a staffer, accounts for the rider at the bottom of the article “the views expressed do not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners”. Cowen in his article titled “Pakistan’s Economy is a Pleasant Surprise” identifies our economy as ‘underrated’ and defines underrated as: “When I started pondering this “underrated” question about 15 years ago, it was mainly about guessing hidden strengths of various economies, based on esoteric knowledge of sectors and regions and histories.
These days, it is most of all an exercise in gauging media overreactions. It’s obvious the country does not have a great external reputation. In a recent poll of favorability, Americans ranked Pakistan at No 136 among 144 nations. As an experiment, I typed “Pakistan” into Google’s news search and the leading entries referred either to terrorism issues or to the possible extension of President Donald Trump’s travel ban”.
And the writer goes on to say “Sri Lanka story is now well-known, and besides the country’s prospects have dimmed as of late. Iran is a contender, as is Saudi Arabia, if only because so many people are convinced the country is going bankrupt”.
Yes we are underrated because we are summarily dismissed by the Western media, and yes portfolio investment has increased significantly (though it has been declining in recent months in spite of tax collections from this source remaining appallingly low leading many to speculate that this enables the Finance Minister to manipulate markets when his policies are challenged) and CPEC can be a game changer if, as per Fitch, the financing of projects is more transparent and the import intensity of projects not high.
PWC is an audit/account firm and I went on their website seeking the entire report on Pakistan but found no reports on countries – not for Pakistan and not for any other country though there were reports on areas of engagement of the firm notably on audit and assurance, entrepreneurial and private clients, advice on how to prioritize infrastructure, tax, sustainability and climate change etc.
However A F Ferguson, part of PWC as per their website, confirmed the article titled “The Long View: How will the global economic order change by 2050?” arguing that emerging markets would dominate the world’s economies and concluded that “by 2050, emerging economies such as Mexico and Indonesia are likely to be larger than the UK and France, while Pakistan and Egypt could overtake Italy and Canada.” One would hope so but this is in the realm of probability and the country has been hearing of a development take-off for more than a few decades.
And finally, Daniel Shane’s article in Barron magazine titled Forget India the new big thing is right next door focuses on advice for stock investors. His focus is the stock market rally which, in his words has “arguably left the market looking a little pricey as the KSE 100 index trades at over 12 times earnings, its heftiest valuation since late 2009” and the benefits that would accrue from CPEC.
But I would again cite the analysis and advice by Fitch with respect to CPEC: “the extent the CPEC benefits the country’s external finances will depend on the exact terms of projects, particularly financing plans and the import intensity of investments”.
All politicians cite positive articles and hence Dar’s citing the positive elements in these four articles is not untoward. But his sole focus on foreign media has already led to his being subjected to ridicule after he was declared the Best Finance Minister in South Asia by a magazine that is read by a few hundred who attend the annual meetings of multilaterals with that particular edition carrying massive advertisement support by Pakistan’s state institutions.
The way out of this is simple. First, direct the FBS to hold a meeting with the country’s economists/media to discuss and if possible dispel the impression of data manipulation; and second to delink the FBS from the administrative control of the Ministry of Finance that would, in turn, lead to greater credibility of national data; and third instead of putting up barriers to researchers/media’s access to information to make governance transparent and accountable.