Talking business

It’s probably the oldest script in Pakistan:  when things turn bad, go running to your creditors to beg for leniency and another helping hand.  And the oldest script in the book is exactly what our finance ministry has resorted to in the face of the country’s catastrophic flooding.

The script has its fair share of irony, comedy and tragedy.

The irony is in the fact that in any talks with the International Monetary Fund (IMF), the worse off a country can show itself to be, the stronger its negotiating position becomes.  It is an irony not lost on those who have turned to the Fund in dire circumstances, just ask Boris Yeltsin.

For the boys at Q block, the floods are a rescue package like none other from the humiliation they were bracing themselves for in the next round of talks with the IMF.  Everybody knows that preparations were already afoot at Q block to build a story around why we have missed, and will continue to miss, some of the most important performance criteria in our programme.

With the floods, they have the perfect excuse.

The comedy in the script is in the numbers.  How ironic, since most people rarely find anything to laugh about in numbers.  Clearly they haven’t looked at Pakistan’s Gross Domestic Product (GDP) growth rate for last fiscal year, conjured up sometime in April or so.  Of course our GDP growth rate for current fiscal year, programmed at 4.5 per cent, will need to be revised downwards, but by how much?

Nobody can really say, although our finance managers are carrying an estimate of one to one and a half per cent with them in their baggage.  But where is the damage assessment upon which this estimate is based?  It’s in the works, not due for another three weeks or so.

There is also comedy in the fiscal numbers, although the market appears to have lost its sense of humour, if recent bond auctions are anything to go by.  The outgoing week saw the second consecutive PIB auction scrapped altogether.

The last time this happened was in November 2004, on the eve of the massive monetary tightening cycle that began in 2005.  And when investors reappeared in longer tenor government paper in May 2009, cut off yields had gone through the roof:  three and five year paper saw yields virtually doubled, and 10 year paper saw them rise by almost 300 basis points.

Today, it seems the market is completely unimpressed with the half percentage point hike in interest rates announced in the last MPS and expects government borrowing to rise substantially in the months to come, hence it’s demanding a continuously rising premium on longer term debt.

It is only a matter of time before these expectations begin lapping up against that flagship government debt instrument:  the three month T-bill.

And of course the tragedy in it all is that the biggest casualty will be the reforms.  Not that the ‘reformed GST’ was going very far anyway.  October 1 was just a date by when to come up with a new story, that’s all.  But to all those in the know about these things, tax reform is something the country has needed for decades now.  And it seems like the floods have washed away all prospects of implementing them.

Gone are the restraints on government spending that were such a hallmark of Pakistan’s economic stabilisation and the only limits on the government now are those being imposed by the market.  Once the government starts paying up the premium yields being demanded by the market, there is no telling where the price spiral will take us.

So let’s prepare for continued recession in private sector economic activity.  Let’s prepare for a deficit opening up like the Red Sea on the command of Moses.  Let’s prepare for heavy government borrowing and spiralling cost of funds that is an inevitable corollary.  And let’s prepare for price inflation since there is no way to borrow and spend that is not inflationary.

Let’s prepare all the excuses we know we’re going to need to give to our creditors as we blow one target after another.  We might as well prepare for all this now because we are back to the oldest script in our history.

the writer is Editor Business and Economic policy for Express News and Express 24/7

Published in The Express Tribune, August 23^rd, 2010.