GDP contracts, food inflation soars – A review of Pakistan's top business stories in 2020

From battling the spread of Covid-19 to tackling the current account and addressing FATF concerns, the govt had its hands full.
Published December 29, 2020

The year 2020 brought with it many unprecedented challenges. While scientists and doctors rushed to make a vaccine for the novel coronavirus that continues to ravage populations across the globe, governments struggled to deal with the economic blowout from the pandemic which literally brought business activity to a grinding halt for months on end.

For a developing country like Pakistan, which is under a mountain of debt and already part of an IMF bailout plan, the situation presented an almost impossible task.

In its second full year of governance, the PTI government had its hands full battling the spread of the deadly virus, tackling the country's current account, domestic economy and addressing the concerns of the Financial Action Task Force (FATF) to name a few, all the while dealing with an extremely resistant opposition.

Here, takes you through some of the biggest business stories of the year, putting them in perspective and helping make sense of where we stand now.

Sugar, wheat inquiry report

Pakistanis were left scratching their heads when commodities considered staples – wheat and sugar – seemingly disappeared from the markets or were being sold at exorbitant prices since late last year. To make matters worse, the government appeared to be as surprised as consumers on what was really going on.

Earlier this year, on the orders of Prime Minister Imran Khan, the government formed a commission to probe the hike in the prices and the shortage of wheat and sugar.

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In April, the much-anticipated inquiry reports were made public and left the ruling coalition red faced because it implicated PTI's Jahangir Tareen, a close friend of the PM, and allied parties’ leaders, Khusro Bakhtiar and Monis Elahi among others.

According to details from the reports, six major sugar mill groups were acting as "cartels" and had committed fraud while a poor procurement had led to the wheat shortfall.

Shortly after, Tareen, whose relationship with the premier had seemingly soured, left the country for "medical treatment". However, he returned to Pakistan in November and said he would help the government in its endeavours to control the sugar shortage and price hike.

In an effort to control the situation, the government resorted to increasing imports and cracking down against hoarders to ensure the availability of the commodities in the market, eventually succeeding in bringing down sugar prices.

In December, the prime minister congratulated his team for bringing down sugar prices through a multi-pronged strategy.

However, till now no concrete action has been taken against those identified in the inquiry reports as having indulged in illegal corporate practices to profit from the shortages and price hikes.

12-year high inflation record

In this file photo, people buy vegetables from Karachi's Empress Market. — Photo by Shahab Nafees/File
In this file photo, people buy vegetables from Karachi's Empress Market. — Photo by Shahab Nafees/File

Shortages in two essential commodities had cause their prices to soar at the end of last year and the trend continued into the new year, which began with a bang in more ways than one. January inflation rate rose to 14.6pc, from 12.6pc during the previous month, reaching the highest level in 12 years.

Data released by the Pakistan Bureau of Statistics showed that higher food prices, particularly those of essential commodities, were the largest driver of overall inflation.

Before the coronavirus pandemic reared its head in the country, the State Bank of Pakistan had maintained its main policy rate at 13.25pc for several months in an effort to rein in inflation. However, in between March and June, the central bank slashed the policy rate from double digits to 7pc in less than 100 days.

Read: SBP acts swiftly for a change

The move to cut rates was prompted by a projection by the IMF that Pakistan's economy would shrink by 1.5pc during FY20 as the pandemic wreaked havoc on the global economy. Since a lower interest rate encourages spending, the move was aimed at minimising damage to the economy.

Following the peak in January, the slowdown in economy activity brought on by the lockdowns helped ease inflation in the coming months and the government's efforts to bring down prices of wheat and sugar also paid some dividend.

By November, overall inflation had eased to 8.3pc but food inflation, which remains in the double-digits, posted a rise in the same month.

Food prices have remained high this year due to several factors including the coronavirus pandemic. In December, the UN food agency said global food commodity prices rose sharply to their highest level in nearly six years, attributing the rise in to adverse weather conditions.

As for Pakistan, prices of essential food items — tomatoes, onions, chicken, eggs, sugar and wheat — have seen consistent increase over the last couple of months. In 2020, egg prices soared across the country to Rs200-240 per dozen.

PM's appeal for debt relief

Shortly after the pandemic hit, the premier called for a global initiative on debt relief for developing countries, so that the latter were better able to deal with the economic fallout from Covid-19.

In April, PM Imran had appealed to the leaders of rich countries, the UN secretary general and heads of financial institutions to give debt relief to developing countries so that they were better able to combat the virus while also addressing other economic challenges.

The premier’s campaign, dubbed the ‘Appeal for Global Initiative on Debt Relief’, was preceded by an extensive diplomatic outreach by the foreign ministry.

Following the prime minister's appeal, G20 announced that Pakistan was included in a group of 72 countries eligible for debt relief on all principal and interest payments to official bilateral creditors.

In June, the Paris Club agreed to suspend debt service payments from Pakistan, Chad, Ethiopia and the Republic of Congo. In December, Pakistan secured $1.7 billion debt relief agreements with 19 bilateral creditors.

Foreign Minister Shah Mahmood Qureshi had called the campaign the fourth global initiative that PM Imran had spearheaded during his term as prime minister, adding that the initiative had benefitted the developing world during a time of crisis.

Economy shrinks first time in decades

Pakistan’s economy suffered a major setback with all key sectors failing to perform per expectation in the wake of the coronavirus outbreak, resulting in a negative 0.38 per cent economic growth rate in fiscal 2019-20.

This marked the first time the economy had contracted since 1968.

For a number of years, the services sector was a major reason for economic growth in the country but it witnessed a rare contraction of 0.59pc for FY2019-20. The primary reason for the crash, as expected, was the impact of Covid-19 and the shrinkage in service delivery in major sectors. However, the agriculture sector posted a paltry growth of 2.67pc while industrial output plunged 2.64pc.

The government had anticipated 3.5pc growth in agriculture, 2.3pc in industry and 4.8pc in services for the year 2019-20.

However, the only silver lining in these results was that the contraction was not as severe as had been predicted by the World Bank and IMF. As it turned out, owing to a remarkable success in dealing with the first wave of the virus and the step-wise opening of the economy, Pakistan was on track for a v-shaped recovery beginning from the the second half of 2020.

In light of improving macros, in November, the State Bank revised upwards its estimate for economic growth during the present fiscal year (2020-21) up to 2.5pc — as opposed to the 0.4pc contraction seen last year.

The new growth projection was slightly better than the government’s target of 2.1pc and the bank’s own earlier expectation of a maximum increase of 2pc in GDP. The growth estimate was based on expectations of a steady performance in agriculture, an upturn in the services sector and a modest increase in industrial output.

Oil crisis

In June this year, petrol disappeared from the markets suddenly resulting in one of the worst fuel crisis in the country in recent times. — Reuters/File
In June this year, petrol disappeared from the markets suddenly resulting in one of the worst fuel crisis in the country in recent times. — Reuters/File

In June this year, petrol disappeared from the markets suddenly resulting in one of the worst fuel crisis in the country in recent times. The crisis peaked around the first week of June, at a time when the government had reduced fuel prices in line with global prices which had slumped on the back of low demand due to the Covid-19 pandemic.

The move to reduce prices locally resulted in an attempt by the oil industry to avoid inventory losses, which eventually resulted in the crisis. Then began a public spar between the government and oil marketing companies (OMCs), with each blaming the other for negligence that led the country into this situation.

Also read: Another oil crisis

While the stakeholders involved in the supply chain remained at odds, the consumer suffered and at times had to pay twice the price to get the commodity.

The supply chain disruption was faced nationwide and affected all major cities and towns in Punjab, Balochistan, Azad Jammu and Kashmir and Gilgit-Baltistan. Khyber Pakhtunkhwa officially said its 77 petrol stations had completely dried out.

The situation began normalising after lockdowns were lifted in July and traffic from international borders began moving but most importantly after the government reversed its earlier decision of price cuts and notified a record hike in the prices of petroleum products.

Earlier this month, a damning report of an inquiry commission – formed on orders of the prime minister – found there were problems at each step of the supply chin that had caused the issue.

Hurling scathing allegations at the entire oil supply chain, from policymakers to regulators and market players down to retail outlets, the 15-member commission on the crisis recommended departmental proceedings against top hierarchy of the petroleum division, dissolution of Ogra and a halt to the operations of refinery and oil marketing company Byco.

Action is yet to be taken on these recommendations by the commission.

Good but not good enough, says FATF

Carrying over from last year, the Financial Action Task Force (FATF) and the possibility of landing on the grey list were once again a top concern for the government.

In October 2019, the FATF had strongly urged Pakistan to swiftly complete its full action plan by February 2020, until which the country would remain on the grey list.

However, when February came rolling around, the FATF gave Pakistan a six-month extension to address the remaining points on its action plan. But Pakistan’s case was not taken up at the June meeting and it was announced that the country would continue to be on grey list till October.

A concrete decision, and a much anticipated one, finally came in October after the FATF decided to grant Pakistan a four-month extension to address the remaining six action plan targets out of a total of 27.

Read: FATF says good, but not good enough

While Pakistan still remains on the FATF's so-called grey list, the government has said that blacklisting the country is now "off the table".

Current account: unprecedented 5-month surplus streak

Pakistan's current account — the status of which has recently became a favourite metric for government politicians to use when hitting back at their opponents — also saw quite an improvement.

Pakistan's fiscal deficit in FY2019-2020 fell by 78pc, according to data from the State Bank of Pakistan. The current account deficit narrowed to $2.966 billion in FY20 as compared to $13.434bn in the previous fiscal year.

Since July, the current account has witnessed a surplus for five consecutive months.

In October, the premier said the country was "headed in the right direction finally" as the current account witnessed a record surplus of $792 million in the first quarter of the current fiscal year.

The upward streak has continued as the current account witnessed a surplus for the fifth consecutive month in November at $447 million as compared to a deficit of $326m during the same time last year.

According to the central bank, the current account has been in surplus throughout the current fiscal year due to an improved trade balance and a sustained increase in remittances. The "recovery" of the current account, coupled with an improvement in financial inflows, also raised the SBP's exchange reserves to their highest level in three years.

A new airline during a pandemic

Prime Minister Imran Khan at the inauguration ceremony of AirSial in Sialkot. — APP
Prime Minister Imran Khan at the inauguration ceremony of AirSial in Sialkot. — APP

While 2020 brought with it some utterly bleak moments, there were also some positive developments. The launch of Air Sial — a private airline spearheaded by Sialkot's business community — in the midst of a pandemic was one such moment.

While the country’s three operational airlines have been taking cost-cutting measures against the backdrop of a crisis that the global aviation industry has been facing since the outbreak of the coronavirus, the decision of Air Sial to enter an already saturated market is being seen as a bold move that may give a tough time to competitors but will benefit the people.

The inauguration of the new airline came in the same year a government inquiry into Pakistan International Airlines — in the aftermath of a devastating crash that claimed the lives of 97 citizens — showed that many pilots working for the national flag carrier did not possess proper credentials.

Analysis: New player’s entry into aviation industry amid pandemic termed bold

Air Sial began operations on Dec 25 with it first flight from Islamabad to Karachi. The airline has said it will initially operate on domestic routes to and from Karachi, Islamabad, Lahore, Peshawar and Sialkot. However, it also plans to fly to foreign destinations.

Other developments that deserve a mention are British Airways operating direct flights from Lahore to London and Virgin Atlantic launching flights for Pakistan.

Controversial social media rules

One of the government's more divisive policies this year was its take on curbing content on social media.

In February, the federal government approved a set of rules to regulate social media in the country, under which companies were obliged to disclose data to a designated investigation agency when sought.

The move draw sharp criticism from all quarters, and the Asia Internet Coalition (AIC) — group of several internet companies including Facebook, Twitter, Google and Amazon — subsequently wrote a letter to the prime minister warning that the new rules would make it "extremely difficult" for digital companies to operate in Pakistan.

Shortly after, the information technology ministry formed a committee to review the rules and consult with the stakeholders; the consultations were boycotted by human rights groups which refused to participate in the process until the rules were revoked.

Things came to a boiling point when the information technology ministry officially notified the rules in November. In yet another letter to the prime minister, the AIC sought his assistance to make critical changes to the rules.

The coalition also called for "credible consultation process" and underscored the lack of credibility and transparency in the process through which the rules were finalised.

However, the Pakistan Telecommunication Authority responded by stating that a “prejudiced and wrong impression" was being created regarding the rules and contradicted the stance of tech companies regarding consultations.

A volatile year for the rupee

Much like other components of the economy, the coronavirus pandemic was instrumental in determining the trajectory of the currency exchange market.

At the start of the year, well before the pandemic had kicked in, the US dollar was trading at around Rs154.64 on Jan 2, according to data released by the State Bank.

Come the virus outbreak and the ensuing lockdown from March 21, the dollar began rising as pressure mounted on the rupee since the pandemic caused serious damage to international trade with the country witnessing an early negative impact in terms of orders. With exports falling dramatically, the demand for the dollar began rising.

By April 8, the rupee had fallen to a record low at the time, of Rs167.90, in interbank trading. The rupee's slide was exacerbated by the central bank slashing interest rates, which make domestic treasury bills less attractive to foreigners, prompting them to disinvest their holdings.

The rupee saw it's lowest point of the year on August 26, when it was trading at an all-time low of Rs168.43 – year-to-date it translated into a decline of almost 9pc. But since then as the country successfully overcame the first virus wave, lockdowns eased and business activity picked up, and so did the rupee.

A rise in remittances and an improved trade balance (low imports and increasing exports) meant the rupee began a three-month rally in August that lasted till the end of November, by which time it had gained almost Rs10 to Rs158.49 – just Rs3.85 or 2.4pc lower than where it started the year (Rs154.64).

Read: Will the rupee’s strength be good for PSX?

As of Dec 28, the rupee was trading at Rs160.3 against the dollar according to SBP data – which means a decline of Rs5.66 or 3.66pc year-to-date.

PSX crashes to historic low

The Pakistan Stock Exchange saw one of its worst bear spells in the first quarter of this year, with the month of March in particular dealing unprecedented losses to investors. In a span of less than three weeks (between March 9 and March 25) the market was forced to halt a record eight times on steep losses after the circuit breaker regulation was activated as Pakistan and the rest of the world grappled with the repercussions of the coronavirus outbreak that had brought economic activity to a standstill.

Read: Another day, another crash at PSX

On March 17, the KSE-100 index plunged 2,375.97 points, representing the steepest ever decline point-wise in a single day and a loss of 6.59 per cent, among the the heaviest one-day drops in percentage terms, second only to the crash of 7.45pc witnessed on May 20, 2002.

But despite this, over the calendar year 2020, the benchmark index ended at 43,755 points versus 40,735 on Jan 1, recording nominal gains of 3,020 points or 7.41 per cent.

The year had started out on a positive tone, but Covid-19 came in late February. Business, industries and markets were devastated and the index started to tumble, settling deep down the dungeon at 27,229 points on March 25.

But as the country started to come to grips with the situation and the pandemic caused much less damage to the economy than was feared, the stock market started to recover.

Read: Taking stock of 2020

The index catapulted by a staggering 16,526 points in the nine-month period from March 25 to Dec 31, providing a massive return of 61pc. Without the massive pullback from the March lows, the year would have joined the two gloomy years of negative stock returns: minus 15pc in 2017 and minus 8pc in 2018.

2 Pakistan firms on Forbes list

Two Pakistani companies have made it to Forbes ‘Asia’s Best Under A Billion 2020' list. — Photo courtesy Forbes
Two Pakistani companies have made it to Forbes ‘Asia’s Best Under A Billion 2020' list. — Photo courtesy Forbes

An achievement that merits being included in this list is the inclusion of two local companies in one of Forbes' most coveted lists for 2020.

In December, information technology company Systems Limited Pakistan (SLP) and local textile giant Feroze1888 Mills made Pakistan proud after making it to Forbes ‘Asia’s Best Under A Billion 2020’ list.

The annual list recognises 200 top-performing small and mid-sized companies in the Asia-Pacific region with sales under $1 billion.

The achievement was also lauded by the PM's aide, Abdul Razak Dawood, who expressed the confidence that recognition of these firms would “provide impetus to others to achieve similar laurels”.

Header illustration by Mushba Said.