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Economic notes

December 10, 2019

Palpable despondency

Opinion

December 10, 2019

The signs of economic stability have strengthened. The most pressing challenge of current account deficit (CAD), with implications for the country’s viability, is firmly in control.

Even if due to one-off items in the non-tax revenues, the fiscal balance in Q1 was remarkably contained at 0.7 percent of GDP, better than last year – a dismal year for fiscal finances. With these two accounts under control, as announced by the finance adviser in his press conference before the arrival of the Fund Mission, there is a sigh of relief from the turbulent winds of instability that kept blowing throughout the last fiscal year.

With government policy having delivered stability, going forward, should there remain a cause for concern? A natural question to ask would be the cost of adjustment and where the burden has fallen, and the future outlook.

Let’s review the key economic indicators and their position when the PTI government started its term in August 2018, and where they stand at present.

First, the GDP growth rate of 5.5 percent in 2017-18 has come down to 3.3 percent (though some economists have estimated it to be around 1.5 percent). The production of both industry and agriculture is down, with LSM showing a negative growth of 6 percent in Q1, after a 3.6 percent decline in 2018-19; the cotton crop has suffered a setback as cotton arrivals were down 26 percent until mid-October. Growth prospects thus look weaker than last year.

Second, the exchange rate was at Rs124/$ and it stands at Rs156 at present. This represents a depreciation of 25 percent. With a sizeable external sector and huge dependence on imported energy and industrial raw materials, such steep devaluation has major implications for the cost of production in the economy. Another major consequence of devaluation is the fall in dollar-denominated GDP. During 2017-18, GDP was estimated at $315 billion, which fell to $284 billion. This is a 10 percent loss of GDP due exclusively to devaluation.

Third, the interest rate was 6.5 percent and today it is 13.25 percent, showing an increase of more than 100 percent. Here again, a steep rise in the interest rate has deeply affected corporate profitability while contributing to higher cost of production across a full spectrum of businesses due to the high cost of finance. Credit to the private sector had fallen by 11 percent during 2018-19. This year it continues to lag significantly behind last year, registering a flow of Rs86 billion until November 29 as against Rs354 billion during the same period last year.

Fourth, inflation was 5.8 percent and has climbed to 12.7 percent. In particular, food inflation was 3 percent and now stands at 16 percent for urban and 19 percent for the rural sector. Finally, the total government debt was Rs24 trillion and now stands at around Rs32 trillion at end-October 2019, showing an unprecedented increase of 33 percent in less than 15 months.

There are no two views regarding the fact that the PTI government inherited a challenging economy. But the policy mix it has chosen has initially worsened the state of the economy. The new economic team has restored stability but the costs, as we noted above, are nearly prohibitive. Its burden has fallen on those who have helplessly seen their incomes falling, both as they lost jobs as well as when inflation eroded their real incomes. In some recent statements, economic managers have acknowledged this fact. However, one has yet to see lowering of guards from the focus on reducing aggregate demand. After nearly five months of tight-fisted policy, one has seen some growth in M2. Of course, the need of the economy is much more.

Let us examine the consequences of the key focus that has exclusively occupied the focus of economic managers. There was a high CAD of nearly $20 billion or 6 percent of GDP. However, the country had seen even higher deficit in the recent past; in 2008-09 it was 8 percent. But the medicine we have applied to correct it has been patchy and excessive. It must be understood that CAD is not an economic ill per se. It is the lack of financing that makes it unsustainable. It has to be recognized that this high CAD was the basis of high growth, which was sacrificed in the manner one approached its resolution.

For instance, much of the imports during 2018-19 were CPEC related, fully financed under the CPEC arrangements. Unwittingly, this was brought to an abrupt halt and remains so to this day. So a great deal of imports have vanished on account of completion of pipeline projects under CPEC, and lack of further flows. In 2017-18, machinery imports were $12 billion (for the second consecutive year), and then fell to $9 billion in 2018-19 and now $3 billion during Jul-Oct 2019, and are continuing to fall.

The structure of our imports is such that, barring the food group (with milk powder and edible oil) constituting about 10 percent of imports, the rest are either machinery or industrial raw materials. We have reduced our imports by $6 billion in 2018-19 while lost exports of $0.233 billion. This year so far, we have reduced imports by $4.6 billion and gained $0.437 billion in our exports. This means we have reduced imports so far by $10.6 billion and increased exports by $0.204 billion. Is this really a reasonable trade-off? And that too at the cost of shaving off 25 percent in the value of rupee.

But more importantly, let us comprehend the loss of GDP last year and very likely during this year also. Economists are estimating that loss of output and job for a populous country like Pakistan, when inflation is hammering the economies of low income groups.

The IMF medicine, chosen consciously, has projected average growth of 3 percent in the next three years. The resulting economic outcomes for jobs and poverty would not only be unbearable for the people but flagrantly out of line with the manifesto of the PTI. The despondency in people’s mood was palpable as over the weekend several TV anchors toured the markets of Lahore and Karachi and randomly interviewed shoppers.

There was hardly a word of khair for the government. An overwhelming majority was critical and hopelessly dejected. There is an urgent need for major course correction by the government. It has to respond to people’s miseries.

The writer is a former finance secretary.

Email: [email protected]

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