Two Years of PTI-Led Government: The writing is on the wall

ARTICLE: The Naya Pakistan dream, and the Naya Pakistan that eventually materialized are two very opposite phenomenons; and businesses have been none the wiser. Just when the sting of FY18-with a crumbling economy deep into external crises-was being put to rest and a whiff of some recovery was pregnant in the air, the government was dealt the deadly card of the coronavirus-a blow that nobody in the world was expecting or prepared for. What ensued is a level of downward spiral the economy has not seen before. According to data released by Pakistan Bureau of Statistics (PBS), the largescale manufacturing (LSM) contracted 10.2 percent in FY20 with nearly all manufacturing and production sectors in red. This negative growth was 5.4 percent in the Jul-Mar period as covid-19 cases started to multiply and it seems, within three months, the decline almost doubled in size. In FY19, the LSM had declined by 2.9 percent as economic austerity followed by a marked slowdown in the economy affected businesses abnormally. Large (and small) businesses bore the brunt of rising input costs, a sharp depreciation of rupee, and tightening monetary policy coupled with a reduction in domestic demand. But the fiscal and monetary steps were necessary evils and the industrial decline an eventuality.

Exports (with >2% share in total) - Thousand Rupees

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HS Code                                                                   FY18         FY19          FY20        FY18-       Share in
                                                                                                                  FY20          total
                                                                                                                Growth        (-FY20)
=====================================================================================================================================
01---Live Animals and Animals Products                                784916.5     783608.3      800755.5           2%             4%
03---Fish and Crustaceans                                             483398.5     457383.4      414390.2         -14%             2%
02---Vegetable Products                                                3051165      3384939       3309150           8%            15%
08---Edible Fruits and Nuts                                           383419.3     428488.5      414166.5           8%             2%
10---Cereals                                                           2158776      2300521       2312939           7%            10%
04---Prepared Foodstuffs; Beverages, Spirits,
Vinegar and Tobacco                                                    1471610      1022258      843357.9         -43%             4%
05---Mineral Products                                                  1301849      1277292      985461.7        -24%              4%
25---Salt, Sulfur, Earth's and Stones, Lime and Stone                 473172.4     520892.6      463400.2          -2%             2%
27---Mineral Fuels, Oils and their Distillation Product               728532.8     675642.4      368993.4         -49%             2%
06---Products of Chemical or Allied Industries                        574703.7     371901.8      386399.2         -33%             2%
07---Plastics and Articles thereof; Rubber and Articles thereof         473400     459000.3        384336         -19%             2%
08---Raw Hide and Skins, Leather, Fur skins and Articles thereof       1091723     888920.8      770095.6         -29%             3%
42---Articles of Leather, Travel Goods and Handbags etc                 735947       623414      582769.6         -21%             3%
11---Textiles and Textile Articles                                    13461042     13658876      12850980          -5%            57%
52---Cotton                                                            3598257      3478470       3094785         -14%            14%
53---Other Vegetable Textile Fibres; Paper Yarn etc.                  3637.899     4399.563      6228.281          71%             0%
61---Articles of Apparel & Clothing Accessories Knit/Cr                2713039      2993729       2853917           5%            13%
62---Articles of Apparel/Clothing Acces not Knited /Cro                2472058      2562403       2562820           4%            11%
63---Other Made-up Textile Articles; Sets, Worn Clothing               4067380      4062527       3804736          -6%            17%
15---Base Metals and Articles or Base Metal                           531131.6     602277.5      611459.6          15%             3%
74---Copper and Articles thereof                                      222017.2     276967.2      354908.9          60%             2%
75---Nickel and Articles thereof                                        34.944       66.676       330.662         846%             0%
18---Optical, Photographic, Cinematographer, Measuring,
Checking, Precision Apparatus                                         422060.3     446344.3      409382.3          -3%             2%
90---Optical, Photographic, Measuring and Medical Inst                410932.3       440434      405754.7          -1%             2%
20---Miscellaneous Manufactured Articles                                534156     512815.9      471319.4         -12%             2%
95---Toys, Games and Sports Requisites; Parts &Acces.                 405271.6     401276.8        356694         -12%             2%
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Textile items also performed better during the quarter as export opportunities grew. One major driver of this was the earlier onset of the covid-19 crises in China that moved orders out of the country toward other markets as that country went into an aggressive lockdown state. Pakistan was able to get some of the scraps from this short-term demand flux but not for its own doing. Then covid came to Pakistan and all sectors were in free-fall. Though lockdowns ran for a short period of time; the damage was already done. To have an honest discussion about what was promised and what was delivered, surely the unforeseen disasters cannot be overlooked, but even pre-corona, little progress on the reforms front was seen for exports, investment and business climate. The government has been vocal and synchronous with business voices that have been calling for a "make in Pakistan" strategy where import bill would be slashed, and local production would hold supreme. But as such, few interventions have been made over the last two years to show government's commitment.

Ease of doing indicators have improved, but firms' costs have not, though tariff rationalization took place to an extent that brought some import tariffs on inputs down. Power however remains pricey. Bank credit was also expensive (until covid hit and monetary policy was loosened) which led to high input costs and cash flow constraints. Businesses were busy putting out short term fires and trying to keep afloat instead of thinking about expansions. Long term borrowing was absent. This remained the case in the first year. One important point to remember here is that even when interest rates are lower, the utilization of export concessional schemes and long-term facilities is limited as SMEs across the country do not easily have access to formal credit.

Businesses performed better in the first half of FY20 as they were less cash strapped, exports were marginally improving (benefitting from GSP plus and China's trade war with the US) and stuck funds with FBR were being released; not to mention depreciation of rupee helped competitiveness from the price perspective.

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Growth in LSM (Jul-Mar)
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                          Weight        YoYGrowth
===========================================================
                                   FY18     FY19       FY20
-----------------------------------------------------------
LSM                       70.3      6.3     -2.9       -5.4
Textile                   20.9      0.6     -0.3       -2.6
Cotton Yarn                 13      0.1        0         -3
Cotton Cloth               7.2        0      0.1       -2.8
Jute Goods                 0.3     33.4    -14.1        8.2
Food                      12.4     -0.3     -4.7       -2.3
Sugar                      3.5    -11.7    -13.3       -1.7
Cigerattes                 2.1     84.9      7.2      -31.5
Vegetable Ghee             1.1      7.4      0.8        5.5
Cooking Oil                2.2      2.9      0.5        9.4
Soft Drinks                0.9     -7.6     -4.2      -11.8
POL                        5.5     12.3       -6      -17.5
Steel                      5.4     27.5      -11         -8
Non-Metallic Minerals      5.4     12.3       -5        1.8
Cement                     5.3     12.4     -5.4        1.7
Automobile                 4.6     18.9     -7.6      -36.5
Jeeps and Cars             2.8     22.1     -0.1      -47.7
Fertilizer                 4.4     -8.3      4.5        5.8
Pharmaceutical             3.6      4.2     -8.4       -5.4
Paper                      2.3        9     -3.9        4.2
Electronics                  2    106.6     23.7      -13.5
Chernies                   1.7      0.5     -3.9       -2.3
Caustic Soda               0.4     21.2     -4.7      -11.5
Leather Products           0.9     -8.2        1          5
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Source SBP Quarterly Reports

But the improvements in numbers have been incremental. On diversification and global competitiveness front, Pakistan has continued to lag. Exports are mainly low value-added goods with a heavy and unhealthy reliance on one exporting segment: Textiles. Investment flows are not steering in the direction of technology upgradation within industries which should improve productivity of labor and allow manufacturers to compete with the products of the world that are becoming more sophisticated and challenging. There is a prevailing anti-export bias (when the domestic price effect of import restrictions and market protection measures exceed the exporter price effect of the export incentives such as subsidies)-which has not been corrected through policies. Market access for exporters is limited to a few major markets and fewer efforts have been made still to change that. It now looks like the Strategic Trade Policy Framework (STPF) has been finalized which would feed growth into the industrial sectors in general and exporting sectors in particular, but long term productivity requires heavy investment push in the right industries which in turn, requires a long-term investment policy.

As it stands, LSM and exports are both expected to improve as the economy trudges out of the covid crisis, remaining largely insulated from any major damages. Production will improve as the Naya Pakistan Housing Program and the government's amnesty package for construction sector goes into effect. Cement, steel and construction materials have found a renewed sense of purpose as demand will expand in these traditional commodities. Delayed effect will be witnessed in other production groups as the economy overall recovers. Interest rates have been slashed (down to 7% from 13.25%) which will reduce cost of borrowing for businesses across the board.

Debilitating energy woes of the country however, will continue to be a deterrent while attracting investment without a purposeful investment policy propelled by an industrial strategy will prove to be difficult as well.

Sentiments matter too. As IK joined office, business folks were hopeful, but began to be less so as months passed and the economy plunged deep into darkness. Firms were worried about high costs, uncertainty in policy and keeping employees on board amid falling demand. This is reflected in the Business Confidence Index (BCI) of the SBP. Post-IMF program, business confidence began to slowly improve only to be thrust into new pits once again as coronavirus rolled in. The pandemic is over for now, and business confidence should improve. The latest wave of BCI is upward moving indicating the same, which is great.

What's not great is this. When the PTI government came to power, it wanted to build 5 million houses in five years. The country is now all set to increase supply by less than 500,000-10 percent of the target. This should serve as a proxy for the rest of the economy. If one were indeed reading the writing on the wall, it is very clear that the current regime of the PTI government is too slow to truly succeed in its lofty ambitions. Sans some positive developments highlighted in this supplement; the likeliest scenario is that the legacy of the PTI government would be to reestablish "business-as-usual" status.

Tweaking monetary and fiscal policies will not bring about long-term changes into the industrial and business sector just as a construction package will merely thrust temporary demand into select industries. Changes such as bringing diversification, boosting innovation and technology infrastructure, transforming production and production processes, improving productivity of human capital, creating "brand Pakistan" in international markets, amongst other important and necessary initiatives are too far into the future for our current reach.

Copyright Business Recorder, 2020