The feel good factor

Pakistans economy went through a patch of low growth and high inflation era (FY08-14) mired with bleak security situation and energy shortages. Lately, the pressure is released somewhat but the feel good factor is overplayed with an asset bubble inflating. The movement in real estate and stock markets are demonstrating that euphoria.

Since 1960 to date, Pakistan has had an average economic growth of 5.2 percent with 8.2 percent inflation. The patch of 2008-14 was a rough time with average GDP growth of 3.1 percent and inflation of 12.2 percent. Now the economy is getting back to equilibrium; but short term investors are overplaying it. What is happening in stock market shows that exuberance and soon this column will attempt to break the reality of fundamentals behind this high market valuation era.

Few industries are expanding in the process and new sectors are emerging in the process. Anything related to infrastructure building is booming, be it cement, steel or chemicals. Consumerism is seeing new heights. If real economy grows at 5 percent with population growth of around 2 percent, the real per capita growth is around 3 percent.

That is a decent growth number and has all the reasons for the economy to expand; but overheating can be detrimental in the long run. The feel good factor in the economy is not letting real investment to grow, but is fueling asset bubbles.

The investment to GDP ratio, which is an indicator of serious investment commitment in the real sector, is still lower than the previous boom - the average Investment to GDP since 1960 to date is 16.7 percent and it was 15.6 percent in the FY16. It's still much lower than its recent peak of 19.5 percent in FY08.

This implies that confidence is restored only in short term investments like real estate and stock market; but the real investment growth is yet to be seen. The low quantum of FDI strengthens the argument of scarcity of real investment.

Pakistans economy is largely consumption base, focused on protecting consumption and usually it's at the cost of low exports and high imports. There is consensus amongst politicians, businesses, media and civil society on keeping overvalued currency. The practice has largely been adopted throughout the history of the country.

In high growth period of 60s, the currency was stable; same is the case of subsequent growth periods. And virtually every high growth period is followed by a balance of payment crisis which resulted in sharp depreciation of currency and high inflation. There was a crisis in 1998; followed by a high growth and stable currency period. Then we had a balance of payment crisis in 2008. Now again the economy is recovering with stable currency against USD at a time when virtually all currencies are depreciating.

What are the externalities of protecting consumerism? It is good for creating businesses in servicing consumer demand and generates employment. But our manufacturing is not catching up to cater demand; and this is fueling imports.

The demand for goods and servicing is increasing rapidly. The per capita income of the country has reached $1,500; and with every hundred dollar increase, demand patterns change significantly. That has happened in Indonesia; the disruption is being experienced in Turkey as well.

Now Pakistan is going through this. GDP per capita was $1,032 in 2008 and now it reaching an inflection point, thereafter the demand disruption takes place in auto, construction, consumer goods and other industries. People with high disposable income will have more appetite for various goods and services.

In absence of any meaningful growth in manufacturing; largely imports will fill the demand. That questions the sustainability of growth. And when the infrastructure building is on foreign loans; repayment can be painful. Its' time to redefine business policies to think manufacturing!