Declaring premature victory

Published January 11, 2021
The 30-month-long ‘success story’ of the current account surplus already hinges on the rapidly rising trade deficit.
The 30-month-long ‘success story’ of the current account surplus already hinges on the rapidly rising trade deficit.

The government has started building its narrative about an economic turnaround based on nascent short-term positives. That is perhaps aimed at building public hopes — something not unusual for political governments.

Largescale manufacturing (LSM) has shown a good trend based on the no-questions-asked policy in the construction sector. Remittances have been better and agriculture’s early signs are encouraging. But all of these areas have many associated ifs and buts over the longer horizon. It is, therefore, essential to simultaneously manage public expectations.

The 30-month-long ‘success story’ of the current account surplus already hinges on the rapidly rising trade deficit. A projected four per cent global economic growth could trigger a hike in global oil prices at a time when the country’s import bill is rising despite economic contraction. The first six months’ exports of $11.5 billion (up 4.98pc over last year) have significantly been surpassed by $23.2bn imports (up5.72pc), expanding the trade deficit by over 32pc to $11.7bn.

Structural reforms remain a pipe dream even on the eve of the third year of a government that will soon be in the election-year gear

Interestingly, while keeping the policy rate unchanged last week, the State Bank of Pakistan (SBP) appeared to be following Prime Minister Imran Khan’s feel-good mantra. Against a budgeted target for GDP growth rate of 2.1pc, the central bank projected real GDP growth in the range of 1.5-2.5pc for the current year. “This is based on the current trends of economic activity,” it said, leaving reasonable space for any change in such trends. Exactly the same day, the World Bank forecast Pakistan’s growth rate at 0.5pc and global economic growth at 4pc in 2021 — about 3.5pc higher than Pakistan’s. “In Pakistan, the recovery is expected to be subdued, with growth at 0.5pc in 2020-21,” it said.

What needs to be kept in mind is the fact that Pakistan’s manufacturing sector has contracted by a cumulative 17-18pc over the past two years. That means that on a scale of 100 in 2018, the manufacturing would still be less than 90 this year from a low base of 82-83. Similarly, even if the national economy grows by 2.5pc as per the SBP’s forecast, real economic growth would still be 0.5pc given the World Bank’s revised estimate for Pakistan’s growth rate of negative 1.9pc instead of negative 0.4pc announced by the government.

The SBP said the economic recovery from Covid-19—induced contraction now faced uncertainty over the second wave of the pandemic, which swept across many countries and gained momentum in Pakistan in November. It also reminded that “sustainable growth over the medium term would require progress on the structural reforms front”.

Supply-side shocks from uncertain weather conditions cannot be ruled out either while there are also potential upsides, the SBP said, adding that “These include the development and distribution of an effective vaccine and its possible early availability.” Interestingly though, there is no vaccine development planned in Pakistan and possible early availability, according to the federal government, is not scheduled before the second quarter of 2021 when the fiscal year will already be in its concluding stage.

Economic recovery will average 1.3pc in the next two fiscal years, says the World Bank

On the other hand, the World Bank noted that Pakistan’s growth was projected to be held back by continued fiscal consolidation pressures and services sector weakness. Hence, the economic recovery in Pakistan would stay restrained, averaging 1.3pc over the next two fiscal years — slightly better than expected in June 2020, but below potential growth. The bank forecasts a 2pc growth rate for Pakistan for next fiscal year (2021-22).

The World Bank also reaffirmed that Pakistan’s outlook was predicated on maintaining the reform momentum and adherence to a macroeconomic sustainability framework. Limited prospects for a strong rebound in the services sector will aggravate poverty as the sector represents about half of Pakistan’s output and an important source of income for low-income households.

Separately, the Economic Adviser’s Wing of the Ministry of Finance has also warned that continued economic recovery in recent months could be affected by the resurgence of new Covid-19 cases. “With the resurgence of new cases of coronavirus, there is a risk of slower economic performance mainly due to halted activities in services,” it said in its Economic Update and Outlook released at the end of December.

It said the economic recovery that started at the beginning of the second quarter of the current fiscal year was keeping its momentum. However, the main risk to the situation was the recently observed resurgence of infections worldwide and also in Pakistan, necessitating the imposition of new restrictions that may affect the economic expansion. “The effects on the economic outlook will depend on the intensity of pandemic and duration of restrictions.”

It said the economy was currently recovering from two consecutive crises. The first one continued for most of 2018 and 2019 and compelled necessary macroeconomic adjustments to correct the accumulation of unsustainable balance-of-payments deficits. The second one was associated with worldwide lockdowns, including in Pakistan, between February and August due to the Covid-19 pandemic. “The recovery from both of these shocks is underway and promises strong growth in the current fiscal year.”

This has also to be remembered that these positive numbers had come in the absence of a tight programme of the International Monetary Fund (IMF) that has to get back on track on the basis of an increase in energy prices at the very least. Meanwhile, power-sector reforms promised by the government are still not in sight even though two special assistants to the prime minister on power have lost their jobs during the period. The circular debt in this period has maintained a steady trajectory of about Rs32bn per month to stand at Rs2.34 trillion at the end of December.

While various amnesty schemes have always made one-time support to revenues, investments and regularisations, the critical lesson carried by all such programmes has so far been that these are unsustainable in the long term. These benefit a select few, mostly the powerful and influential, for a limited period and support jobs and economic activities along the way. But they are untenable in the long term.

The areas that involve the long-term support to the economy are the critical structural reforms that continue to remain a pipe dream even on the eve of the third year of a political government that will soon be descending into the election-year gear.

Published in Dawn, The Business and Finance Weekly, January 11th, 2021

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