The US economy shrank in the first two quarters of this year. And even if it experiences expansion in the third and fourth quarters, full year growth may not exceed 1.5 per cent in 2022. It may eventually fall to just 0.5pc in 2023, according to the latest forecast of the Organisation of Economic Cooperation and Development (OECD).
The OECD said in a recent report that growth in the Eurozone may also contract to only 0.3pc next year from this year’s estimated growth of 3.1pc. Only 0.3pc overall growth for the Eurozone indicates that many economies may experience outright recession.
Germany, particularly, looks heading in this direction because of gas shortages created by the halt in supplies from Russia. The OECD has projected the German economy to contract by 0.7pc in 2023. It has also projected much lower GDP growth in China at a decades-low level of 3.2pc this year and 4.7pc next year.
These projections should be a cause of concern for Pakistan because the bulk of its exports goes to the US, Europe and China. In FY22 ending in June, about 21pc of export earnings originated from the US, followed by Western Europe 14.3pc, Northern Europe 9.2pc, China 8.6pc and Southern Europe 8.4pc, calculations based on State Bank of Pakistan’s data show.
Fears of global recession indicate lower demand in Pakistan’s export markets at a time when the country is facing supply chain challenges for imports of raw materials amidst monetary tightening policies
Recession in some parts of Europe and slower growth elsewhere plus an economic slowdown in the US and China may potentially reduce demand for Pakistan’s exports. Further escalation in Russia-Ukraine may also take a toll on our exports. It could disrupt and delay export shipments and make the import of raw materials for export-based industries more cumbersome and costlier.
At home, challenges to export growth are also many and diversified.
These include falling output of big industries amidst prospects of post-flood economic slowdown, record-high inflation that has made local raw materials pricier and the depreciating rupee that has pushed up prices of imported raw materials. In addition, the monsoon flash floods that have caused Pakistan’s economy a loss of no less than $28 billion have washed away a large part of fruits and vegetable crops, besides killing about 1.16 million cattle heads.
Exports of fruits were under pressure even before the floods due to increased local consumption amidst falling output due to crop switching and crop-related diseases. Their post-flood exports will naturally fall faster. Exports of vegetables grew before the floods, but the trend is reversing.
The leather sector’s exports had stagnated even before the floods, chiefly due to the increased energy cost and pricier bank loans. Post-flood export earnings may decline as the loss of cattle heads in the floods begins to affect the supply chain and pricing patterns of animal hides and skins.
Prospects are also cloudy for growth in textiles exports that claim about 64pc share in total export earnings. Some critical issues that the textile industry is current facing include higher energy prices, shortage of local cotton and broken supply chains after the floods, higher cost of imported raw materials due to the rupee’s depreciation and increased cost of bank loans due to ongoing monetary tightening.
During the first two months of FY23, textile export earnings rose just 4.2pc year-on-year to $3.056bn. In the coming months, this growth may accelerate if the government delays the withdrawal of energy subsidies from export-oriented industries.
New Finance Minister Ishaq Dar has indicated he would talk to the International Monetary Fund and seek waivers and soften its loan programme conditions. However, even in that case, structural issues facing the textile industry, like low investment in machinery, low level of innovation and scarcity of world-class textile brands coupled with the post-flood problems, may affect growth in export earnings.
Most of Pakistan’s textile products go to the US and Europe. Growth in textiles exports also hinges on demand originating from there and on how long the US and EU authorities continue to offer trade incentives to Pakistan amidst fast-changing geostrategic policies.
The previous government of Imran Khan had set a $35bn target for goods exports for the current fiscal year, and the new government has not changed the target. Forex-starved Pakistan can hardly afford to miss this target. But considerable slippage seems inevitable in the wake of the devastating floods and fast-approaching recession/economic slowdown in many parts of the world.
A massive 30pc depreciation in the Pakistani rupee in the last fiscal year (ended in June) boosted goods exports to $31.8bn from $25.3bn a year ago. In the first three months of this fiscal year (July-Sept 2022), the rupee has lost 11.5pc value to the US dollar — notwithstanding a handsome gain of 4.7pc it made in the last week of September.
Lower rupee vis-à-vis foreign currencies should ideally help exporters increase exports. But it depends on how much more depreciation in the rupee value takes place during the rest of the fiscal year ending in June 2023 — and whether the forex market remains market-driven or the rupee is made “artificially stronger”.
Published in Dawn, The Business and Finance Weekly, October 3rd, 2022