Growth stories

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Every spurt of growth in the country’s history has been accompanied by a story saying the good times are here to stay. “Pakistan’s economy performed exceptionally well,” wrote the State Bank in July of 2005, “with a record growth estimated at 8.4 per cent in two decades. The growth is broad based as all segments of the economy contributed significantly to GDP growth”.
It had been two years since the current account balance had been deteriorating, and next to this “record growth” the country had also seen a record trade deficit in the same year. “The performance of the external sector has been satisfactory,” the State Bank declared, “despite a record trade deficit of $6.2 billion (custom based) during FY05. Trade deficit may not be taken as a source of concern because it has primarily emanated from production-oriented imports like oil, machinery and raw materials.”
Recall that between the years 2000 and 2003, Pakistan’s current account balance had been in surplus, on the back of a moribund economy. It was in 2002 that the regime of Gen Musharraf decided to ramp up growth, by pressing simultaneously on the monetary and fiscal accelerators. As soon as this growth picked up though, the current account balance deteriorated, and from a surplus of $3.5bn in 2003, plummeted to a deficit of $3.6bn by 2005 (this is calendar year data from the World Bank) when this sunny assessment was rolled out by the State Bank.
“It has been the sustainability of workers’ remittances at around $4bn a year that has contained the overall balance of payments,” the State Bank wrote, while trying to minimise the risks posed by the deterioration in this critical indicator. In reality, the current account balance continued to deteriorate at a growing pace every year since then, till it hit its trough in 2007, triggering calls for a return to the IMF.
It is possible to quote extensively from the State Bank’s own documents through those years — how they built a sunny story around this constant and steady deterioration in the external balance, how they tried in vain to contain inflation (the discount rate was hiked by something like two percentage points in that year after having been held constant for a number of years before) while at the same time fuelling monetary expansion through rising government borrowing from the State Bank. All of it was in vain because the inevitable result was a crash less than three years later.
The same story repeated itself in the next growth spurt that began in 2013, reached its peak in 2016, then began its slide towards crash in 2017. In November 2014, for example, at a time when growth was powering on, the State Bank pointed to remittances as the main source of strength in the external sector as the trade deficit mounted. The next year it pointed to the surplus in the financial account saying it would help “ensuring an upward trajectory in foreign exchange reserves” even as the current account was poised to go over a cliff. In November 2016, halfway down that cliff, it said: “Pakistan’s continuous build-up of external buffers over the last three years has improved its resilience against external uncertainties.” This was a prayer, nothing else.
I was reminded of all this once again as I saw Reza Baqir try his hand at this waltz for the third time during the monetary policy announcement this week. The accompanying text of the monetary policy statement says “there were good reasons to expect that, unlike several previous growth upturns in Pakistan, the current economic recovery would be accompanied by external stability”. It does not tell you that the State Bank said the same thing at the start of every previous growth upturn as well.
The current account deficit is rising, he acknowledged in his remarks, but is the “lowest in 10 years”. This is true, but not the important thing. What is important is the direction. On that point he assured us that some of this deficit owes itself to “seasonal imports”, some to one-off items like vaccine imports, and some to food imports. He said its pace increase is not likely to continue. Perhaps, but this is probably the third time we are hearing the State Bank tell us that at the start of one of these things.
He rightly pointed out that this time a few things are different. The exchange rate is not fixed, for example, and is working like a “shock absorber”. Fair enough, but interest rates seem to be fixed and it remains to be seen how much leeway he will have to deviate from his “accommodative stance”. This is the opposite of how it was in 2005, for example, when the interest rate was allowed to move to fight inflation, but the exchange rate was kept fixed. It worked briefly back then, but not sufficiently to stave off the inevitable slide into crises. Will it be different this time? There are a few other things that are different this time round too. Pakistan was the recipient of huge quantities of ‘war on terror’ support from the outside world in the 2000s, and the recipient of massive support from Saudi Arabia and China in the years after 2013.
Without massive external support, such growth spurts cannot last long, not even the few years they’ve lasted in the past. Baqir told us that next year’s external financing needs are fully secured, which is reassuring, but there are years after that too.
From here on, the government will move increasingly towards election mode, and any room to adjust to rising vulnerabilities is likely to constrict. It would be to Baqir’s advantage to leave some language on the page as a caveat, if things don’t work out as well as he might be hoping. If for no other reason, simply because people sometimes come and read these things long after they have been put out. It is worth asking how well they will age.