Back on track

Despite unfavourable conditions, certain sectors registered growth and kindled hopes for a recovery

The national economy went through a turbulent phase during the year 2020 and for the first time there was a 0.4 per cent contraction. The impact of Covid-19 spread and the consequent lockdowns was severe and affected almost every aspect of life. The government took certain measures to keep people safe from the onslaught of the pandemic as well as imminent hunger. Its major concern was that a total lockdown could lead to the loss of livelihood for millions of Pakistanis. Partial closures were introduced therefore and the industry, agriculture and construction were exempted.

Despite unfavourable conditions, certain sectors registered growth and kindled hopes for a recovery. The early lifting of industrial lockdown, for example, helped Pakistan win export orders, especially for textiles products and cement. The international buyers turned to Pakistan as regional competitors like India and Bangladesh were still facing lockdowns. There was a drastic decline in current account deficit, foreign remittances increased, imports came down and domestic tourism flourished.

As the year 2021 has started and the news about Covid-19 vaccines are making the rounds, there are hopes that for Pakistan this year will not be as treacherous as the previous ones especially on the economic front. No doubt a lot depends on how the state handles the pandemic but projections by international organisations are better. For example, the Asian Development Bank (ADB) has predicted that Pakistan’s economy will grow at a rate of around 2 percent in 2021, which is a considerable improvement on the 0.5 per cent growth prediction made by the World Bank in October 2020.

According to the ADB estimates, industrial growth will improve in the fiscal year 2021, led predominantly by construction and small-scale manufacturing. In addition to this, it says, the normalisation of global economic conditions, improved market sentiment and stronger business and consumer confidence will have a positive effect.

Hasaan Khawar, a development sector specialist and economic analyst, says the government seems to have a better grip on economy now than it did before the pandemic, with textiles and construction sector booming, power sector reforms in the pipeline, reforms being finalised in Pakistan International Airlines (PIA) and Pakistan Steel Mills (PSM) and low interest rates. Where the country stands today, despite Covid-19, he says, should be seen as a tremendous achievement. “But 2021 is the year for Prime Minister Imran Khan and his team to consolidate these gains.” He says this would require fiscal discipline; taking some tough decisions especially on increase in power sector tariffs and doing away with tax exemptions; and going through with envisaged reforms.

Another positive indicator is that the current account balance is finally out of deficit for the first time since 2015. It is likely that the things will remain in Pakistan’s favour in 2021 as well. This surplus is attributed mainly to a sustained increase in foreign remittances, export earnings and a consistent fall in imports. The relief in debt payments due to Covid-19 has also left the country with some precious foreign exchange reserves and fiscal space.

However, Nauman Kabir, the Pakistan Industrial and Traders’ Association Front (PIAF) chairman, believes that the general discouraging of imports has had some adverse effects as well. He supports restrictions on the import of fruits, biscuits, chocolates and luxury items but not industrial raw materials for which there is no local substitute. The raw material for steel industry, for example, he says is getting dearer by 20 per cent every month because its supply from abroad has become intermittent and slow. He says bringing down the current account deficit at the cost of industry is not a sound policy.

The real estate and construction industry are expected to show a robust growth in 2021. The concessions given by the government to these sectors have a lot to do with it. The investors will not be asked to disclose their source of income. Kabir says similar incentives should be given to all investors willing to set up industry in Pakistan. This way, he says, there will be new jobs and sustained growth.

Mass layoffs in the Gulf region had raised apprehensions of eventual decline in remittances following a short-lived increase attributed to final settlements and severance benefits paid to laid off workers. However, the remittances have continued to grow. Between July and November, the remittances grew by 26.9 per cent as compared to the same period the previous year.

Another positive indicator is that the current account balance is finally out of deficit for the first time since 2015. It is likely that the things will remain in Pakistan’s favour in 2021 as well. This surplus is attributed mainly to a sustained increase in foreign remittances, export earnings and a consistent fall in imports.

It is expected that the remittances will sustain their level during 2021, says Mansoor Khan, a labour market analyst. He says the extraordinary benefits offered to Pakistani expatriates by Pakistani banks have discouraged resort to non-banking channels like hundi for the transfer of money. Besides, as travel to home country has declined due to pandemic the expatriates are sending more money in the form of remittances. Yet another reason, Khan says, is that many expatriates are relocating to Pakistan over health concerns and the money they bring along is getting counted as remittances.

Ali Khizer, a business research head at a local media house, says the lower interest rates, the fall in petrol prices and the reduced or restricted travel have benefited the country though recession has negative impacts like job losses as well. However, he says, the negative impact in Pakistan was less than many other countries. “The automobile industry is poised to take off in 2021 with more than half a dozen new players entering the market.” He says the low interest rates are a major reason behind the increase in car sales.

Khizer says cement sector is also showing growth because of increase in construction activity and building of two dams. Besides, he says, the increase in international prices of cement has improved the prospects of Pakistani cement exports.

The export of textile products can maintain the trajectory if Pakistan enters the synthetic products sector. Besides, it is hoped that food inflation will not be as bad as in the previous year considering the government is unlikely to commit the same blunders again. The ADB outlook predicts food inflation during 2021 to be around 7.6 per cent.

Economist Asad Sayeed points out that the growth in textile exports was partly due to shut downs in Bangladesh, India and Vietnam. Going forward, the challenge will be to sustain the market share thus captured.

The manufacturing sector growth, he says was significant on account of a low base effect. The manufacturing numbers are still not at the level of 2018. The growth may not go further than utilisation of available capacity. In fact, energy bottlenecks and Covid-related risks might even curtail it.

He also says the current account balance is mainly contingent on remittance growth sustaining over the year particularly once oil prices rise and imports increase.

He warns that there are massive uncertainties looming around the energy sector. This is true for both electricity and gas. Non-resolution of issues in this sector will ripple through all sectors of the economy.

In the agriculture sector, issues of pricing and mismanagement of major crops might create rural-urban tensions and inflationary pressure.

The FBR’s revenues remain another concern. The budgeted growth in revenues for FY21 is close to 25 percent and growth in the first five months has been a mere 4 percent. This could undo the gains on stabilisation that have taken place on the external front.

He also worries that investment levels are extremely low and the risk profile in the coming year is not going to change this trend in spite of the investment friendly policies of the State Bank of Pakistan.

Political uncertainty and the government’s anti-corruption drive without reforms in the accountability law may continue to be major deterrents for both foreign and domestic investors.

The author is a staff member.

Back on track: Certain sectors registered growth and kindled hopes for a recovery in Pakistan