Disproportionate celebrations

Published August 24, 2020
The weeklong merriment by about three dozen cabinet members counting their two-year performance did not commensurate with a meek show on the ground. — APP/File
The weeklong merriment by about three dozen cabinet members counting their two-year performance did not commensurate with a meek show on the ground. — APP/File

Pakistan completed a second consecutive fiscal year (2019-20) of depressed economic performance, culminating in a historic natural disaster — the Covid-19 pandemic. This also coincided with the completion of almost the first two years of the Pakistan Tehrik-e-Insaf government.

The two years cumulatively contracted the country’s economic growth rate by almost -6.2 per cent as it dropped from 5.8pc in 2017-18 to about 1.9pc in FY2018-19 and further down to -0.4pc in 2019-20 — the lowest since 1952. The size of the economy also kept going down for two years in a row by almost $51bn (16.2pc) to $264bn from $315bn in these two years. This is also an atypical phenomenon.

A large majority of the population faced economic hardships as their personal incomes faltered and jobs were lost as industrial activity struggled and business processes came almost to a halt. The fewer positive developments like contraction in current account deficit and better control on civil expenditures marketed by the government as its successes were overshadowed by largely depressing signs.

The downside is that even the ongoing fiscal year is not expected to be much better. A fragile recovery and nominal GDP growth rate at best. Therefore, the weeklong celebrations by about three dozen cabinet members counting their 2-year performance did not commensurate with a meek show on the ground.

The Covid-19 pandemic hit Pakistan in March and consumed almost the full last quarter of the fiscal year. But even before the pandemic, the economic growth targetted at 3 or 4pc for last fiscal year appeared elusive.

The weeklong merriment by about three dozen cabinet members counting their two-year performance did not commensurate with a meek show on the ground

The Planning Commission summarised that “prospects for economic growth even before the emergency of Covid-19 were eclipsed by higher inflation and interest rates, negative large scale manufacturing (LSM) growth, weaker exports, sluggish resource mobilisation, uncertainty surrounding hot money inflows and above all tough International Monetary Fund programme related conditionalities. The painful and prolonged adjustment programme brought stabilisation but at the cost of economic growth. High policy rate, exchange rate and taxation reforms have increased cost of doing business and have hampered industrial growth”.

The fiscal challenges continued to haunt the government as its second year concluded at an elevated fiscal deficit of 8.1pc of GDP on top of the 9pc budget deficit in its first year — the highest in 40 years. The total public debt thus kept going up from 72.5pc of GDP at the end of June 2019 to 87pc of GDP down the road.

Even these deficits were ‘bad deficit’ as described in economic jargon as was caused by a massive Rs1.555 trillion revenue shortfalls. This obviously had an adverse impact on the development and social sector. In other words, about 3.72pc deficit was accrued due to revenue shortfall and just 2.8pc because of development expenditure. In 2018-19, the development expenditure had stood at 3.1pc of GDP compared to 4.6pc of GDP in 2017-18.

Cumulatively put, the two years thus emerged as bad economic years from the public angle — low-to-negative economic growth with high inflation that got close to 15pc (14.7pc precisely in January 2020) before tapering off and continuously rising debt burden and deteriorating debt sustainability.

Agriculture mostly remained unaffected during the year despite locust attack and faired well even during Covid-19 pandemic as the government reached out to the farmers through public sector procurement of cash crops but then struggled to ensure its benefits reach the common man as the rate of increase in prices of wheat and sugar, among other crops, made fresh records.

On the other hand, the LSM output went down by more than 10pc during 2019-20 — again a record in recent history — on top of 3.64pc decline in production in 2018-19. This indicated the industrial contraction was getting well-entrenched but then the resultant low base also provides a great opportunity to show quick revival depending on the resurgence of domestic and international demand.

The contraction was almost across the board in 2019-20 — petroleum sector production plunged by 20pc on top of a similar 8.35pc fall a year earlier and general industry going negative by over 7.2pc on top of 2.83pc in FY2018-19. All the 11 products on the petroleum production index went down while just three out of 24 general industry products showed insignificant improvement over the previous year output. The production of all the six products (cars, tractors, trucks, buses, motorcycles and light commercial vehicles) in the automobile sector went down by 23 to 55pc.

Ironically, the performance of key industries like textiles, food & beverages, coke & petroleum, pharmaceutical & chemicals, automobile, non-metallic mineral products, iron & steel and paper and board was also in the negative during 2018-19.

No wonder then, the exports were down by 6.81pc during 2019-20. Imports on the other hand also dropped by almost 18.7pc, bringing down the overall trade deficit by more than 29pc to $17.9bn. On the positive side, remittances from overseas Pakistani increased by about 2.7pc to $20.7bn — contrary to forecasts by lending agencies earnings from Pakistanis abroad could decline by over 20pc. As a result, the current account deficit also dropped by more than 73pc to just $3.3bn at the end of last fiscal year.

The total foreign exchange reserves at $19.65bn now are enough for about six months of current imports even though the country’s net international reserves (NIR) still remain in the negative. The reserves had last stood at this level in January 2018 but central bank reserves had amounted to $13.7bn at the time compared to $12.6bn at present.

Based on some of these indicators, the major rating agencies — Standard & Poor’s and Moody’s — have affirmed Pakistan’s sovereign rating at B-negative with long term stable outlook but noted the ratings were constrained by a narrow tax base, weak debt sustainability and high domestic and external security risks.

The Standard & Poor’s noted last week Pakistan’s worst economic performance on record in fiscal 2020 and forecast a modest expansion of 1.3pc in fiscal 2021. “Taken together with its relatively fast population growth of approximately 2pc per year, real per capita economic growth will likely remain negative for a third straight year, at -0.7pc,” it said adding that will contribute to a further decline in Pakistan’s 10-year weighted average per capita growth rate to just 0.6pc, well below the global median of 1.5pc for economies at a similar level of income.

It said the rupee’s 38pc depreciation against the dollar between 2017 and 2020 had also contributed to a considerable decline in the economy’s nominal GDP per capita and “forecast GDP per capita to remain just above $1,200 by the end of this fiscal year, versus closer to $1,600 in fiscal 2018”.

Published in Dawn, The Business and Finance Weekly, August 24th, 2020

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