Risks to production-led growth

Published August 9, 2021
The trade gap has been widening since December 2020 and rose in July by 81.4 per cent to $3.058 billion from $1.686bn in the same month of last year. — AFP/File
The trade gap has been widening since December 2020 and rose in July by 81.4 per cent to $3.058 billion from $1.686bn in the same month of last year. — AFP/File

In the first month of the current fiscal year, the growth momentum was driven by the production side of the economy, reflected in the exports and imports of goods and services, says the Monthly Economic Outlook, (MEO) released by the Ministry of Finance (MoF) on July 28.

However, the MEO report warns that transition to higher economic growth could build pressure on the external account. It has called for close monitoring to ensure that the new growth strategy is sustainable without any macroeconomic imbalance as observed in the past.

In the past few decades, the financialisation of the global economy — the dominance of finance capital over interests of commodity producers —has kept production/exports below potential and resulted in frequent financial crises.

In Pakistan, it is mainly the imports, which are more than double the export earnings from merchandise, that have helped economic recovery and also met domestic demand of essential commodities in 2020-21.

The trade gap has been widening since December 2020 and rose in July by 81.4 per cent to $3.058 billion from $1.686bn in the same month of last year. Imports for July were recorded at $5.405bn against exports worth $2.347bn.

Critics say more than half of the current dollar reserves are from foreign borrowings including costly commercial debt

Addressing a press conference, Advisor to Prime Minister on Commerce Razak Dawood said the commerce ministry has set an export target of $38.7bn for the current fiscal year. Exports of goods are projected to fetch $31.2bn and services $7.5bn.

The government has also reportedly projected foreign direct investment (FDI) at $2.65bn and inflow of remittances at $31.3bn.

The growth target of 4.8pc, if achieved, according to an independent economist, would push imports to $70bn in 2021-22.

To achieve exports and FDI targets, the expected renewed focus on the completion of Special Economic Zones (SEZs) has, however, yet to bear fruits. The Industrial Framework Agreement between China and Pakistan has not been finalised so far. Nor has a developer been selected for the prioritised Dhabeji SEZ in Sindh.

To fast track China-Pakistan Economic Corridor (CPEC) projects, Khalid Mansoor, a corporate leader, was appointed Special Assistant to the Prime Minister on August 3. He has replaced Rtd Lt. General Asim Saleem Bajwa as the authority to lead CPEC affairs. Mansoor is also likely to take on the additional charge of the CPEC Authority.

Unlike several previous growth upturns in Pakistan, State Bank of Pakistan (SBP) Governor Reza Baqir says the current economic recovery would be accompanied by external stability. His views are not shared by many.

The SBP governor expects that in August the reserve buffer will rise by another receipt of $2.8bn through International Monetary Fund (IMF) planned new global special drawing rights allocation for helping borrowers to overcome debt and Covid-19 challenges.

He says the financing need of the current 2021-22 estimated by him at $20bn will be more than fully met. And he is confident that the current account deficit will remain at a manageable level of 2-3pc of GDP.

Excluding any disbursement from the IMF, the government estimates foreign loans of $14.1bn that seem to differ from the SBP projection. The IMF assesses Pakistan’s gross external financial requirements at $23bn.

Critics say more than half of the current dollar reserves are from foreign borrowings including costly commercial debt.

Trade bodies also tend to disagree with the central bank’s position and policy. While they have welcomed the policy shift from stability to growth they are unhappy with the current SBP discount rate and falling rupee value.

The ongoing devaluation means a burden on the economy, says Pakistan Business and Intellectuals Forum. Industrial revival and economic growth, it reminds, is not possible without the stability of the rupee.

Between July 1 to August 2, the dollar appreciated by 3.9pc to close at Rs167.63. The record high imports of over $6bn in June is stated by market players to have set the import trend in July which eroded the exchange rate stability.

Earlier the rupee depreciated by 7pc with the dollar traded at Rs162.43 on July 30 up from average parity of Rs152.28 in May.

Currency dealers say that the creeping current account deficit prompted importers to book dollars as much as possible fearing the greenback’s appreciation.

The last quarter of 2020-21 witnessed an unprecedented 52pc jump in food imports, 39pc in machinery, 278pc in transport equipment, 150pc in petroleum etc.

With foreign exchange reserves not at a disturbing level and current account deficit still at a low historical standard and balance of payments in surplus in June, some analysts argue there was no justification for dollar appreciation.

The current account which was surplus in April turned into a deficit of $1.8m by the end of 2020-21 mainly on the surge in June imports. Reflecting an adverse trend in 2020-21, exports fetched $25.6bn, or half of the $52.1b imports. The trade deficit was mainly financed by workers remittances, now at over $29bn per annum and surging foreign debts.

The apex trade body, the Federation of Pakistan Chamber of Commerce is pressing the central bank to reduce its policy rate. Some analysts want the discount rate to be pegged to the core inflation as was pre-May 2019 position. The core inflation now is at 5.6pc and the policy rate is at 7pc.

The role of finance capital in industrial and economic development is contracting because of current and balance of payments deficits in emerging markets and developing countries, many of whom are heavily under foreign debt.

In the case of Pakistan, bank credit to the private sector has declined from 24.1pc of GDP in 1995 to 17.9pc in 2019, according to the Pakistan Research Institute of Market Economy, a think-tank based in Islamabad.

The credit disbursements to the private sector were heavily skewed towards large enterprises with a share of 87pc in total loans.

Going by a media report, there is a perception among small businessmen that the bulk of the bank credit meant for small and medium enterprises was availed by sister concerns of large enterprises in the sector.

On the other hand, the banks’ investment in government securities as a share of their investment portfolio jumped from 10pc in 2010 to 40.6pc in 2020. And the profitability of the banking sector increased from Rs7bn in 2000 to Rs244bn in 2020.

A surge in imports and sharp rupee depreciation has also helped increase tax revenue in July. Over $51.3pc of the total tax revenue was collected at the import stage by the Federal Board of Revenue (FBR). This helped the tax collection to exceed the month’s revenue target by Rs71bn. The FBR’s performance was applauded by the prime minister.

Published in Dawn, The Business and Finance Weekly, August 9th, 2021

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