Growth prospects

There is considerable lack of clarity currently about the prospects for the economy of Pakistan in 2020-21. The Government has fixed a GDP growth rate target for the year of 2.1 percent. The ADB has endorsed this projection on the basis of the expectation that economic sentiment will improve with the likely subsiding of COVID-19 and the resumption of structural reforms. Similarly, in its recent Monetary Policy Statement the SBP has asserted that business confidence and the outlook for growth have improved. Both ADB and the SBP have projected that the economy will recover somewhat and achieve a growth rate of 2 percent in 2020-21.

However, a few days ago, the World Bank dropped a kind of bombshell. It has forecast a growth rate of the Pakistan economy of only 0.5 percent in 2020-21. This is based on a possible resurgence of the pandemic and widespread damage to crops due to locusts and heavy monsoon rains leading to flood in parts of the country. As the IMF programmes becomes operative once again, the World Bank expects that strong fiscal and monetary compression measures will need to be adopted which will inevitably constrain growth.

This fundamental difference in the assessment of the economic prospects of the country highlights the mixed nature of trends being observed currently on virtually every front. These contrasting signals are highlighted below.

The first area is trends in the 'real' sector of the economy. The SBP has highlighted the 5 percent growth in the Quantum Index of Manufacturing in July 20. This is the first month with significant positive growth with negative growth over the previous six months. This turnaround is taken as a sign of recovery in the large-scale manufacturing sector. But almost half the growth is due to a 76 percent increase in the production of cigarettes for inexplicable reasons. The Pakistan Bureau of Statistics (PBS) shows a near 2 percent growth in the textile sector. However, this is not consistent with the big declines in the volumes of exports of both cotton cloth and yarn in July and August. As such, it is too early to say that there has been a sustainable recovery in the manufacturing sector.

The Government has chosen the construction sector as the sector which will lead the process of recovery. There are clear signs of big double-digit growth in cement output and sales. But other industries producing various other construction inputs continue to experience falling output. This includes the steel products and paints industries. Also, real wages of construction workers are falling. During the first quarter of 2020-21 they have fallen by almost 2 percent. The nominal wage of construction workers is rising at a significantly lower rate than in 2019. Clearly, demand for labor input in construction activities has not increased enough so as to provide for any buoyancy in wages.

There are some positive signs in other sectors. The sale of petroleum products has risen significantly in July 2020. According to the OCAC, an increase of 21 percent has been recorded in the sale of High-Speed Diesel and of 13 percent in motor spirit. This highlights the restoration of the flows of goods following the earlier lockdowns.

There is need to also look at the demand-side of the economy. The immediate aftermath of the spread of COVID-19 was a lockdown and unemployment of workers especially in the informal sector of the economy. This will have impacted on private consumer expenditure. However, the efforts by the Government to protect poor households must be recognized. Almost 15 million cash transfers of Rs 12,000 each have been made through the Ehsaas Program since the beginning of April.

The first indicator of consumer demand is the level of import of basic food items. The first two months of 2020-21 have seen an increase of 43 percent in the import palm oil, 49 percent in tea and 45 percent in spices quantitatively. However, import of pulses is down by 4 percent and of milk food by 27 percent. Overall, the value of imports in the food group is up by 40 percent.

The domestic production of consumer goods and durables has also shown a mixed trend. Production of cars was down by 49 percent in July 20. But there was a jump of over 30 percent in the output of motor cycles. The output of beverages has gone up by 9 percent. Similarly, there has been an across the board increase in production of different types of pharmaceuticals. However, there are very big falls in output of over 35 percent in consumer durables like TV sets, refrigerators, etc.

Overall, there appears to be some recovery in consumer spending especially in basic food items. The trend in public consumption expenditure is not known until the data for fiscal operations is released for the first quarter of 2020-21. The targets set in the Federal budget of 2020-21, however, clearly indicate that there is little scope for a real increase in such expenditure.

Turning to private investment, the first indications are very negative. Import of machinery is down by 17 percent in the first two months of 2020-21. Credit off-take by the private sector is down by Rs 157 billion as compared to the level on the 30th of June 2020. This is an almost 155 percent bigger decline than observed in the corresponding period of 2019. This is not surprising given the uncertain nature of the prospects for Pakistan's economy in the next few years.

Public investment appears to be more dynamic at this time, especially at the Federal level. The Government has been making much bigger releases for projects, perhaps as a way to providing a stimulus to the economy. Up to 5th of October the total release of funds is Rs 270 billion, almost 41 percent of the size of the budgeted PSDP for 2020-21.

However, the Provincial Governments are facing acute financial constraints as indicated by the low level of their cash balances, which are only 40 percent of the level on the corresponding date of last year. In fact, the Government of Sindh is actually running a cash deficit. Therefore, the likelihood is that development spending at the Provincial level remains depressed.

What is likely to be the trade deficit in goods and services at constant prices of 2005-06? First indications are that it will worsen. Quantities of exports are generally down up to August 20, while volumes of imports have increased. Simultaneously, the trade balance in services has worsened. Therefore, the first indications are a worsening in the real trade balance.

Overall, there are mixed indications about the level of aggregate demand in the economy. Private consumer spending is somewhat on the higher side, while public spending is probably flat in real terms. Private investment is showing a sharp downward trend, while development spending at the Federal level is up but Provincial project allocations are likely to be down. The trade deficit in goods and services appears to be deteriorating in real terms. Therefore, there is the likelihood that aggregate demand may not show much buoyancy in 2020-21.

There is also the need to recognize that as and when the IMF program becomes operative once again, there will be stronger pressure to control the level of aggregate demand for ensuring economic stability. In this sense the World Bank's view appears to be valid.

The overall assessment is that while a growth rate of 0.5 percent in 2020-21 is on the low side it is not clear at this stage how much higher it will be. In the optimistic case, when there is no second round of COVID-19 and there is no severe management of aggregate demand, the GDP growth rate may be significantly higher. But it is unlikely to approach 2 percent in 2020-21.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2020