Sunday December 04, 2022

Analysis: Global recession brings relief to masses, for now

July 15, 2022

ISLAMABAD: It is a good omen that Pakistan and the IMF have reached a staff-level agreement, which will usher in a new era of stability for the country, also paving the way for disbursement of $1.17 billion, but recession in big economies across the world has proved to be a blessing in disguise for the import-led economy of Pakistan— for now.

In the wake of the recession in the US, China and the EU countries, the crude oil and POL [petrol, oil and lubricants] prices in the international market went down to $97 per barrel because of low demand, which once touched the staggering figure of $123 per barrel in the past months. The higher inflation and increase in discount rates in big economies have slowed down on account of the Russian invasion of Ukraine. This has also led to a decline in food commodities in the international market that will also bring a relief in prices of edible oil and lead to import of wheat at lower prices.

According to the latest forecast of the World Bank, the global growth, which was recorded at 5.7 per cent in 2021, has gone down to 2.9pc in 2022, and this is expected to hover around at this pace over 2023-24, as the war in Ukraine disrupted activity, investment, and trade in the near term, pent-up demand faded, and fiscal and monetary policy accommodation was withdrawn. As a result of the damage from the pandemic and the war, the level of per capita income in developing economies this year will be nearly 5 per cent below its pre-pandemic trend.

However, this recession has not only brought relief to Pakistan’s economy in POL prices by Rs15-38.99 per litre but also solace in commodities’ prices. The electricity tariff would also decrease under the monthly fuel mechanism. This government is also to issue a new tender for the import of wheat after a massive fall in its prices. The government earlier scratched the tender as the bids were on the higher side and later on the prices of wheat plunged because of recession in big economies. The government has also made a plan to reduce the prices of edible oil and pulses.

Now a question arises that for how long the recession will continue to persist. And if the recession is short-lived, then the situation will prove to be other way round for Pakistan. If it continues for a longer period, then Pakistan’s economy will continue to have relief in terms of import of fuel and commodities such as wheat, edible oil and pulses. However, the growth in exports may hamper because of less demand in the US and EU, and China in the wake of the recession. The export sector, including the textile industry, which has been extended by the existing government the gas tariff of $9 per MMBTU and the electricity rate of 9 cents per unit, needs to keep the momentum of the exports by running its mills efficiently and let not allow India, Vietnam and Bangladesh to eat the cake of exports, which will squeeze because of recession.

The government also needs to fully implement the retrofitted budget 2022-23 after input from the IMF with full zeal and fervour so that the country’s economic outlook improves and gets a positive assessment from international rating agencies, paving the way for the government to generate funding from the international market through various bonds at acceptable interest rates.

And the government also needs to announce more incentives for increasing the remittances in the country as because of the recession in the world, they are feared to fall. This scribe also touched on eminent economists seeking their comments over the impact of the recession on Pakistan’s economy and they said that the Russia-Ukraine war and re-emergence of Covid-19 triggered high prices of crude oil and gas, which caused global inflation and the increase in interest rates. That slowed down the global growth owing to which the demand of fuel and food commodities across the world went down.

Dr Ashfaque H Hasan, principal and dean at NUST School of Social Sciences and Humanities, says that the Russia-Ukraine war caused the increase in crude oil and POL prices in the international market, owing to which half of the population of EU countries has switched over to bicycles for commuting purposes. The inflation in the US and EU countries went up, which slowed down the global growth. The re-emergence of Covid-19 in China has also caused a slowdown in the Chinese economy. This recession has led to the fall of POL prices, which brought relief to Pakistan’s masses. However, Dr Khan said the recession may be short-lived; only for days, and not for months.

Eminent economist Sakib Sherani says that the recent fall in international commodity prices is also welcome news for countries like Pakistan. While this has happened due to a rising expectation in financial markets that there will be a global recession, this is not inevitable. The US and Europe appear headed for a recession, but China and many emerging markets seem to be on a firmer footing for now. In addition, it is still not clear how OPEC+ will respond to the decline in oil prices. And the EU's embargo on Russian oil is going to come into full effect later in the year. “Hence, the situation with regard to international commodity prices will only become clearer in a few months,” he opined.

Sherani, while commenting on the staff-level agreement with the IMF, said: “The revival of the Fund programme is welcome news for Pakistan in the immediate term. It saves the country from a Sri Lanka-type situation. However, an IMF programme has several undesirable consequences too. Among them is the issue of moral hazard, i.e. providing a safety net to bad economic policies and choices of a ruling elite that refuses to reform. In addition, it shifts the burden of adjustment to those not responsible for the economic mess and least able to afford the consequences.”

Dr Khaqan Najib, former adviser to finance minister, said that as economies opened after Covid-19, led by policies to stimulate the growth both by central banks as well as government, demand erupted quite sharply, but at the same time the supply constraints due to geopolitical situation led to a sharp rise in inflation across the globe.

This has pushed the central banks to tighten their monetary policies and slow global economic growth, which resulted in the fall of crude oil prices to below $97 per barrel from nearly $122 per barrel.

Although, this is good for oil importing countries like Pakistan, which are reeling under import pressure and high current account deficit, but slowing down in the global economy is a double-edged sword as the imports may be lowered but exports of the country could be hit up to 9-10 per cent in the coming months.

Dr Najib concluded that if the government is able to keep exports stable and ensure remittances do not fall from the recent high levels the country has achieved, the benefits of lower import prices in all commodities will help stabilise the economy quicker.