Interview: Dr Rashid Amjad
Higher growth or not, the economy remains stagflated
It’s budget time, so we head to the old Lahore School of Economics (LSE) Liberty Campus to talk to Dr Rashid Amjad. He’s currently director, Graduate Institute of Development Studies there, and teaches MPhil classes.
He’s been around, served as vice chancellor of Pakistan Institute of Development Economics (PIDE) and also as chief economist/member at the Planning Commission, besides working at the International Labour Organisation (ILO) and having written extensively on Pakistan’s economics.
It is the peak of the Lahori summer, but his office is nicely air conditioned.
“Oh the weather’s much better in here”, he says, extending his hand from across the table as we begin.
I tell him I was present at the Government College seminar room when he came during his time at the ILO a decade and a half ago. It turns out he likes talking about his alma mater. He went there in its best days, when Dr Nazir was principal, Professor Rasheed (Prof) headed the economics department, and department legends like Dar sahib and Shoaib Hashmi were among his seniors.
But the budget, of course, dominates the interview.
There is a lot of potential to grow in the economy, he says, though realising it is another matter. And as far as Pakistan’s financial balance sheet is concerned, it is good that the slight increase in forex reserves, the marginal decline in the fiscal deficit, and the stability of sorts in the exchange rate has made things more comfortable.
Stock market resilience, too, is indicative of business confidence and a feel good factor on part of the private sector.
“But the economy is still deeply stagflated”, he adds. “And things are very disappointing. There is no significant change in growth either (when adjusted) and the higher figure (marginally) owed primarily to better energy to large scale manufacturing which pushed up exports slightly”.
But that too slowed down in the second half of the last fiscal. Add to that still pretty high inflation – merely below two-digit is not good enough for Pakistan – and the picture is not as rosy as the government would like to paint.
However, to understand any particular budget document, it must be viewed in a wider framework. And to be fair, macro-management in the immediate term has been somewhat constrained by the IMF program.
“My view is that it would have been better for the government to go for a smaller adjustment loan, say a couple of billion, to give more time to work out the macro skeleton, and the growth and development strategy”, he says.
Now there are binding constraints, and as always, the centrality attached to narrowing the fiscal deficit invariably cuts into the development program. “The axe always falls on the PSDP, and given the large impact in terms of growth and development, seriously contracts growth”.
But there are also other major problems. There is poor economic management in terms of coordination at the federal level between the finance ministry, planning commission, and the state bank. A similar problem exists between provinces and the federal government.
It’s about trade-offs
There are, he says, inbuilt mechanisms in the system to solve such problems, but they are not used properly.
“Unfortunately, the Economic Coordination Committee of the Cabinet (ECC) has been reduced to a simple file-pushing, micro decision making body. There are no discussions on economic growth, inflation, exports, development expenditure, etc, in this forum anymore”, he adds. “Here we miss an opportunity to monitor progress, manage targets, etc”.
But considering where we are, and the fact that there is marginal growth, is the path of mega projects, motorways, and large power plants the right one to take considering the economy?
Ultimately economics, he stresses, is about trade-offs. The economist can tell the politician what is possible and what is not, but the ultimate decision rests with the latter.
And the thing about mega-projects is that they concentrate money in small circles, and the overall impact is lost. Also, when payment time comes, the PSDP is again compromised, eating into growth.
He calls this the “throw-forward effect” on the PSDP.
The compulsions notwithstanding, he feels the real test of the government will come by the time of the next budget. There is an unspoken tradition, he says, of the first year belonging to the finance minister, and the government.
“You give them the benefit of the doubt. They always tend to inherit a challenging and depressed economy, and have to balance many things at once”, he says, adding “so it’s natural for them to play upon positives”.
And a good indicator of progress in the following year will be progress made by the private sector.
“You need to understand that to revive growth with equity would require a significant jump in private investment”, he points out.
So the finance minister is right about reducing government borrowing? How else would private sector crowding out, long a feature of the economy, suddenly turn around?
“It is true that the private sector has very high hopes from this government”, he adds. “But it is also true that monetary policy is practically non-existent. It is subservient to fiscal policy”.
And there is definitely a need to rethink monetary policy. Simply using interest rate as a lever has never worked for us. But again we must first shed the IMF umbrella, which restricts such actions. Our core concerns are growth and inflation, and we might find that the trade-off between them is not as high as thought to be.
So the way I understand it, if the state bank is able to exercise some sort of autonomy, and government borrowing indeed decreases as the finance minister has promised, the right kind of moneys supply toggling can trigger private sector multiplier and rein in inflation at the same time.
Art of achieving goals
There is little else to talk about in budget season. The numbers are never as important as the posture of the government. Most important targets are usually missed anyway. But we do touch upon a couple of things.
He is all for opening up to India, but “on the same terms and conditions that they are providing us”, he stresses. He advocates the MFN status for India, or Non Discriminatory Market Access (NDMA) as it is now known, but if India employs non tariff barriers, “we must ensure that it becomes attractive for India not to do so”.
There is also a need to allow certain sectors protection for a fixed time, for example agriculture and chemicals.
“Economic management is the art of achieving goals in given political and other constraints”, he says, and we must keep our feet on the ground but still take the high road.
With that, it’s time for his next class, and I must leave his office for the hot afternoon sun.