Growth outlook gets murkier
The notable progress made so far in ongoing reforms with a myopic approach to achieving macroeconomic stability is now being underlined by a growing perception that the outlook for economic growth is getting murkier.
According to the UN report titled “World Economic Situation and Prospects,” Pakistan’s economy is expected to grow at 2.1 per cent in 2019-20 — i.e. lower than the earlier growth rate forecasts by multilateral agencies supporting the reforms agenda, and close to half of Islamabad’s targeted rate. And to quote an independent analyst, economic activities continue to lose momentum without interruption since its initial signs appeared in December 2018.
“The economy is likely to recover slightly from 2020-21 onwards as the increase in government revenue from a tax hike allowing expanded public investment and other economic reforms required by the International Monetary Fund (IMF) begins to bear fruit,” says the UN report.
There is a strong opinion that inflation is squeezing the space for commodity production with the simultaneous erosion of purchasing power, curtailing domestic demand for goods. On the external front, sluggish exports pose a daunting challenge.
The domestic environment is not conducive for fresh investment and economic growth
Former adviser to the finance ministry Dr Ashfaque Hasan Khan says that a high discount rate has “severally crippled” economic activity. Quoting a State Bank of Pakistan (SBP) working paper, he says a 1pc increase in the policy rate contributes to a 0.7pc increase in inflation. He observed that Pakistan was facing cost-push inflation, not demand-pull inflation.
In its latest update, the IMF’s World Economic Outlook report has projected inflation at 13pc for 2019-20 against 7.3pc in 2018-19.
The rupee was stated to be 4pc undervalued in September 2019 when compared to its effective exchange rate, fuelling import-related inflation.
Inflation has emerged as the most important source for the government to raise revenues. Of the 17pc increase in tax revenue in July-December, inflation contributed 12 percentage points, economic growth three percentage points, and tax policy and administrative measures two percentage points.
Dwelling on the contribution of various sectors to tax revenue, former finance minister Dr Hafiz Pasha says 70pc of the national revenue is generated from the large-scale manufacturing sector.
With the manufacturing sector hit by negative 6pc growth in the first five months of the fiscal year and the construction industry expansion constrained by low federal and provincial development spending, Dr Pasha concludes: “(The) overall outlook for GDP growth is depressing. This will have a negative impact on the level of employment and poverty.” The IMF sees unemployment rising by one percentage point to 6.2pc in 2019-20.
Addressing businessmen, President Arif Alvi stressed the need for the private sector to create jobs and stop the brain drain by creating conducive working environment. Federation of Pakistan Chambers of Commerce and Industry President Anjum Nisar responded by saying that high interest rates were a major hurdle in investment and business.
Going by the available data of the past 18 months and reforms entering the decisive phase, the domestic environment is currently less conducive for fresh investment and economic growth than earlier. Credit to the private sector fell by 77pc to Rs177bn in July-December 2019.
No doubt the current account deficit is narrowing, but on the back of industry-destabilising import contraction and surging inflows of “hot money” with foreign lenders and investors in commodity-producing sectors constrained by an economy still not out of the woods. Pakistan’s foreign debt sustainability indicators have worsened significantly — some of them breaching the red lines set by the Mid-Term Debt Strategy.
The external outlook for our exports is clouded by a slowing global economy struggling with the key problem of imbalances in international trade. In 2019, economic growth of Germany, only country in the European Union to have achieved export-led growth for 10 successive years, plummeted to 0.6pc, down significantly from 1.5pc in 2018.
Experts say that “solid domestic demand saved the economy from recession last year”. Ratings agency Moody’s cautioned that a deteriorating global environment “will weigh on the growth rate in (eurozone) member states”.
The European chief economist at Standards and Poor’s called the latest US-China trade deal the tip of the iceberg. He warned that “trade tensions could move on, and Europe could find itself at the centre of the debate.”
Going by our own experience during the last PML-N government, economic growth was consumption-led. But domestic demand was being met by growing imports instead of domestic production. Now Pakistan plans to provide strategic protection to its infant industry that will be phased out to make import substitution industries globally competitive.
The kind of politics that has emerged after the amendment to the Army Act is also casting a shadow on economic reforms. Instead of reaching out to mainstream opposition parties for the consensus on a common minimum agenda to remove difficulties in the implementation of the reforms programme, the PTI-led coalition is finding itself sucked into discord not only with its allies but within the ranks of its leadership.
Assembly members want funds for their electoral constituencies. Under the latest power-sharing arrangement, according to a media report, Rs20bn has been allocated for development in the constituencies dominated by the PML-Q.
The centralised mode of tackling problems is cracking under its own weight, creating room for democracy to work.
Facing political pressure on the flour crisis, the weakened federal government had to put off the hike in the gas tariff set to be increased on Jan 20.
The likely elevated domestic resistance may finally persuade the IMF with no option but to moderate the pace of reforms. Recognising ground realities, the Fund had given waivers for missed benchmarks in the past as well.
Published in Dawn, The Business and Finance Weekly, January 27th, 2020
