Economy review

State Bank of Pakistan Governor Dr Reza Baqir sounded all upbeat in his talk about Pakistan’s economy on the eve of Independence Day. He believes that all short-term indicators show that the stabilization phase has ended, and the country’s economy has entered the growth stage. Though there are signs of a growing economy, the governor’s remarks deserve some deeper analysis. Economic recession and low GDP growth have been a distinguishing feature of Pakistan’s economy since 2018. Even before the Covid-19 pandemic hit the world, Pakistan’s economy was on a rapid downslide. In the beginning of this calendar year, the prognosis was that the GDP growth would be around two percent in the fiscal year ending in June 2021. But then suddenly we got to know that the new estimate was four percent. Now the government is claiming that the estimate for this year is four to five percent growth. What the SBP governor calls ‘the stabilization phase’ was actually a phase of decline that lasted for nearly three years. The challenges of current account deficit and fiscal deficit are looming large, and independent economists are warning against any complacency in this regard. The only proof that the government is touting is the estimate of four percent growth.

While it is true that auto and cement sales have shown an uptick, the reasons behind this upsurge are questionable. For example, auto sales are riding on the back of bank loans. One can also recall the high level of sales in house mortgages before the world economy went through the Great Recession of the late 2000s. Cement sales are surging thanks to the government’s extremely lenient approach towards the real-estate sector that mostly benefits the land mafia and construction tycoons. A boom in construction may show a short-term improvement in some indicators but in the long run the real-estate business does not contribute to any improvement in our exports which are still lagging behind. The people of Pakistan are reeling under one of the highest inflation rates in the world and in the country’s history. The rising prices of electricity for consumers have made life even more difficult.

When the government presented the budget a couple of months back, it promised not to impose new taxes; we have seen multiple budget promises broken in such a short period of time. The government’s net international reserves are not promising, and it is still relying on new special drawing rights (SDR) allocated by the IMF. The current account deficit figures are also not presenting a rosy picture. The promise of the SBP in its monetary policy that the current account deficit would be between two and three percent of the GDP this fiscal year should be taken with a pinch of salt because it roughly translates to a current deficit of $6 billion to $9 billion for this year. Though the government claims it is a sustainable level of current account deficit, observers of Pakistan’s economy have their reservations about this assessment. If the government claims are true, then it should not be looking towards the IMF again. Unless our reserve losses are reversed, the claim will not hold much ground. The exchange rate is also fluctuating, and we have seen the rupee depreciating in recent weeks – hardly a sign of a strong economy. All this shows that a more circumspect approach is needed for the economy.