Federal Finance Minister Ishaq Dar bragged about the Price Water House Coopers (PWC) Report, in which it was claimed that by 2050 Pakistan and Egypt could overtake Italy and Canada while presenting the budget for fiscal year 2017-18 on the floor of the House, then again during the post-budget press conference and, reportedly, insisted that it be cited in the Economic Survey 2016-17. The PWC report titled The Long View How will the global economic order change by 2050 was uploaded on the web in February 2017. After a careful read of the report, the critical question to one’s mind is whether Dar misread the report or misrepresented it? The former implies lack of understanding and the latter a deliberate attempt to mislead the nation.
First, a recap of what Dar has been loudly proclaiming. In his budget speech, he stated the writing on the wall is obvious today only the message has changed. Today globally credible institutions like Price Waterhouse Coopers have said that ‘Pakistan economy is set to be among the 20 largest (G20) economies of the world by 2030’. The Economic Survey 2016-17, produced by the Finance Division, which is under Dar’s administrative control, stated according to a report published by PWC Pakistan, is projected to become the world’s 20th largest economy by 2030 and 16th largest by 2050.
The quotes in Dar’s budget speech are false as no such statement has been made in the report though he could well dismiss the quote as a typographical error. The reason: the report is focused on emerging economies notably China (which is projected to retain its number one status) and India (which is projected to improve its ranking from 2016’s third position to second position by 2050). However Figure 2 of the report carries a graph which supports what is cited in Dar’s speech and the Economic Survey but includes the rather implausible Pakistan ranking in 2016 at 24.
How come we were ranked at 24 in the world in 2016? Or equally importantly how come India was ranked at 3rd position in 2016 with only US and China ahead with its huge poverty packets. The answer is that the Gross Domestic Product ranking projections were based on Purchasing Power Parity (PPP) which adjusts for price differentials between countries reflecting the volume of goods and services produced and not GDP at market exchange rate (MER) which would reflect the value of goods and services in the local currency and converting it into dollars based on market rates; though to be fair to Dar the heavily overvalued rupee would have enabled him to show a better GDP MER than is in fact the case.
There were a number of assumptions made in the PWC report that projected long-term GDP at PPP and the question is whether Dar delivering on these assumptions. First, the PWC report assumes pro-growth friendly (but not perfect) policies. During the past four years if one was compelled to be as succinct as the report’s assumption then our policies – far from perfect can be characterised as pro-deficit reducing with an anti-growth bias. The government may defend itself by arguing that the country was on a three-year International Monetary Fund (IMF) programme from September 2013 till 2016 and hence was constrained by the standard conditionalities that focus on deficit reduction. This argument is flawed because numerous waivers were granted to Pakistan during this programme including failure to deliver on key structural reforms in the energy sector, privatisation, and tax system. Had Dar after the first year and a half into the IMF programme argued in favour of less rigid adherence to the time bound deficit reduction conditionalities and more in favour of growth enhancing policies he may not have had to resort to data manipulation to appease his one man constituency: the Prime Minister. Incidentally, data manipulation evident from the failure to rationalise data generated by various government institutions and credible industry data accounts for overstating the volume of goods produced in the country – in industry, agriculture as well as services sector – precisely what PPP measures.
With respect to GDP at MER, the PWC report ranks Pakistan at 28 in 2016, 27 in 2030 and 19 in 2050. But here is the rider: missing from the top 32 list are a host of countries, including Belgium, Norway, Sweden, Holland, Switzerland, Portugal, Saudi Arabia, Qatar, the United Arab Emirates and New Zealand, etc., to name a few.
Second, the report assumes that low level of development provides more opportunities for catch up with higher income countries by making use of their technologies. Dar has consistently claimed that the unprecedented rise in imports at a time when international price of oil has been declining (hitherto consisting of the bulk of our imports) will fuel productivity. This claim is not backed by data uploaded by the State Bank of Pakistan: machinery imports rose by 2.24 billion dollars between 2013 and 2016 less than half the decline – 5.65 billion dollars – in our import bill due to lower oil price. In addition, the bulk of the increase, more than half, was in power generating machinery, and the current power outages are unlikely to bring a comfort level to the public.
But one key assumption in the PWC report is that one percentage rise in investment particularly infrastructure development would raise GDP by 0.5 percent and one would assume with higher private instead of public investment. The foreign direct investment under the China Pakistan Economic Corridor is expected to raise investment considerably; however, data contained in the Economic Survey 2016-17 is disturbing: total investment as a percentage of GDP was 15.71 in 2014-15 and provisional data for the current year gives the rate of 15.78 percent but this less than one percent rise is based on lower private sector investment (10.36 percent in 2014-15 and 9.90 percent in the current year). Additionally domestic savings declined from 13.9 percent in 2012-13 to 13.1 percent in the outgoing year all due to Dar’s decision to lower savings rate in products offered by national savings centres to understate the debt servicing on domestic loans a gap between investment and savings that was filled by domestic and foreign borrowing.
For understating foreign loans, Dar has relied on an overvalued rupee. Be that as it may, the PWC report assumes that high levels of debt (Pakistan’s domestic indebtedness rose by 54 percent in Dar’s four years and foreign indebtedness by 24 percent) with a steadily rising reliance on the prohibitively expensive borrowing from foreign banks which at present stand at 2 billion dollars) impact on growth.
And lucky for Dar commodity exports were not included in the long run model by PWC report and which have been steadily declining since fiscal year 2015. Four PWC assumptions which led to our favourable ranking but should sound alarm bells for the Sharif administration are: (i) population growth could boost GDP in Pakistan however the PWC report adds a rider, ‘only if jobs can be created for young people’. Prime Minister’s Youth programme that includes distribution of laptops, special loans for start up businesses, training, fee reimbursements etc do not guarantee more jobs in the economy and surveys indicate that it is the Pakistan Tehreek-e-Insaf (PTI) that is making inroads into the youth vote that may explain the failure of the schemes; (ii) a link between education and growth but in Pakistan education, a provincial subject post-18th Amendment, has not been the major recipient of government funds except in Khyber Pakhtunkhwa though this year being election year the governments of Punjab and Sindh have prioritised this sector; (iii) there are no natural disasters or catastrophes example floods or drought disasters that Pakistan is subjected to almost every year now; in the words of the recent World Bank report Pakistan is domestically exposed to natural disasters, terrorism and political events; and (iv) the challenge of implementing structural reforms to improve macroeconomic fundamentals and institutions and the World Bank in its recent report urged the government to continue with reforms identified by IMF in its recent programme though there appears to be a singular lack of government interest in this regard.
To return to the question posed in the beginning of the article: did Dar misread the PWC report or deliberately misrepresent it? Dar has no academic credentials as an economist and his four year handling of the economy is characterized by following the IMF prescription in curtailing the deficit at the cost of growth, heavy borrowing and data manipulation. In contrast the Economic Advisor has the academic credentials and experience that Dar clearly lacks. As a public servant drawing a salary from the taxes we pay it is incumbent on him to present a true picture of the state of the economy and not put his personal interests, possibility of suspension or transfer, above those of the country; sadly he is vigorously defending flawed data and policies and, as criticism against Dar’s policies gathers momentum, routinely engages in writing rebuttals.