Stories and guesswork….Khurram Husain
MANY years ago, I was asked the following question: is it true that when a country gets onto an IMF programme it is never able to exit and remains in the clutches of the lender forever? The answer was obvious: no, it is not true. And then came the inevitable follow-up remark: Ive heard otherwise, somebody was telling me it is true.
There is no debating or conversing with people like this. Whether or not the statement is true is easily verifiable. All information about all IMF programmes extended to every country is available on their website, and it is not rocket science to look up the information and see for yourself that there are untold examples of countries that have entered Fund programmes, exited them, and rarely returned. There is literally no need to go asking other people or run with something someone told you.
This is very common in our economic conversation. Things that are easily verifiable turn into extended debates based on guesswork and deduction, usually based on something someone said and nothing more. In fact, so common is this practice that even at the top levels of our policymaking, critical questions facing the economy are frequently debated on the basis of guesswork, deduction and simply things people have said.
Consider the important question of the causes of inflation in the economy. The data is all available to help us answer this question. Yet we continue with guesswork and things people say and little more. The data shows very clearly that every episode of high inflation in the past quarter century is preceded by a spurt of money supply creation.
We dont need fancy theories to understand how this leads to inflation. When a government prints money and the corresponding supply of goods and services does not increase in the same proportion, then it stands to reason that inflation will follow. The data shows this. Common sense tells us this. And yet guesswork dominates our conversation around inflation.
Things that are easily verifiable turn into extended debates based on guesswork and deduction.
The same is true in other areas. For example, a study on the impact of power subsidies provided to exporters found that these had minimal impact on exports or investment. During the Covid pandemic, these subsidies were ramped up, which made sense, but once the lockdowns receded and normality returned, these exporters lobbied for a continuation of these subsidies.
Left to their own devices, they would lobby endlessly, making up one excuse after another, and once their wishes were granted, they would argue for the quantum of the subsidy to be increased.
But the data was showing that these subsidies did nothing to promote exports. They raised issues with the data, but the government was reluctant to carry out further evidence-based assessments to determine whether these subsidies were yielding benefits in proportion to their costs.
The resultant debate, cut off from evidence-based verification, descended into guesswork and storytelling as the way to make the case for continuation of the subsidy. Once that happens the loudest voice wins.
In FY20 alone, the government paid up to Rs50 billion to extend this subsidy, but the evidence showed the increase in exporting was statistically insignificant on average. This was a firm-level study, and it was possible for some firms to have done better than others in terms of converting energy subsidies into export earnings, but the average across the board showed no significant relationship.
The same could well be true for the refinance facilities the State Bank operates, although there is a dire shortage of evidence-based assessments to determine whether or not these have actually helped the goals to which they are addressed.
The closest we came to perhaps getting such an evidence-based assessment done was the recent ruckus created around the benefits of the Temporary Economic Refinance Facility (TERF) when the Public Accounts Committee (PAC) of the National Assembly decided to look into the list of beneficiaries of this facility, that supposedly saw up to $3bn distributed in the form of subsidised loans to large businesses.
The problem was the PAC was only looking for stories through its questioning of the State Bank around this facility. They were not interested in asking for evidence of the benefits the facility yielded versus the costs it imposed on the country.
To recall, the TERF basically saw the State Bank printing money and handing this out to banks for onward lending to industry specifically for the purpose of importing machinery. Why was such a facility the need of the hour at the height of a pandemic? (It was announced in the summer of 2020, the peak Covid months.) What role did it play in depleting the countrys foreign exchange reserves? What benefits was it supposed to produce, and how far did it achieve its own goals?
None of these questions came under the spotlight at the PAC. All they wanted to know was whether specific individuals engaged in corruption while the scheme operated. The fact that total disbursements under the scheme came to almost 15 per cent of total broad money supply, and that this massive amount of printed money had strong inflationary consequences, was of no interest to the PAC that had begun to back away from its inquiry as this piece was being written.
All successive governments have run massive schemes involving subsidised provision of energy, credit and other things to big industry. But when it comes to assessing the impact of these schemes, to determine whether or not they yield any benefits in proportion to the resources they absorb, there is hardly any work to speak of. All we rely on is stories (mostly those told by the beneficiaries themselves) or on deductive guesswork. And this is what perpetuates rackets more than anything else.
The writer is a business and economy journalist.
khurram.husain@gmail.com
Twitter: @khurramhusain
Courtesy Dawn, July 13th, 2023