We respect the opinion printed by Business Recorder Editorial on 25th March 2022, one of the most widely viewed publications in Pakistan. We share the newspaper’s concerns regarding the turmoil in the international markets with record increase in energy and food prices and its fallout on Pakistan’s trade deficit and rising inflation headwinds. However, we disagree with the author’s view that policy makers are unaware of the challenges facing the economy and all is ‘not well’.
In our view, due to the timely fiscal and monetary actions taken by the policy makers, Pakistan is faring better than other regional economies in managing the current crisis, just as our economy outperformed during the Covid crisis.
The key risk of a balance of payment crisis has been pre-empted through early fiscal and monetary adjustments, and as a result we are already seeing that the current account deficit (CAD) has started to decline, falling to $ 545mn in Feb, from average of $ 1.5 billion in the previous seven months. Similarly, on the fiscal front tax collections have increased 30% in the current year, giving much needed fiscal space for the government to undertake relief measures against inflation for the public.
We acknowledge the risks to the growth outlook highlighted by the author. However, in our view, the economy will sustain growth of 5%, due to the incentives given by the government to the farmers, construction industry, export sector and now to the manufacturing sector. We are on target to achieve record exports of $30 billion, record remittances $ 32bn and highest ever agriculture farm output in history. Private sector credit growth has doubled in the current year, as a result of higher manufacturing and services industry activity. Manufacturing sector (LSM) has posted growth of 7.6% in the current year, and the manufacturing index (QIM) in January 2022 posted the highest ever output recorded. Profitability of the top 100 companies listed on PSX posted the growth of 62% in 2021, the highest growth in the last 10 years.
On the energy sector the author rightly points out that ‘previous administrations agreed to contractual obligations that are against the interests of the consumers’ with capacity payment estimated at Rs 1,455 bn in 2023, from Rs 468 bn in 2018. We want to highlight that significant progress has been made by the government to renegotiate long term contracts with IPPs, 878kms new transmission infrastructure has been added to reduce transmission and distribution losses under CPEC, and for the first time ever three new hydel projects have been launched to reduce the energy import dependency of Pakistan. These reforms will benefit consumers over the long term.
READ THE EDITORIAL HERE: Frankly speaking, all is not well with economy
The newspaper expressed concern that rising inflation in Pakistan is due to higher government spending. We would like to correct the author that unlike previous inflation episodes, the government has not borrowed any money from the central bank (money printing) since 2019. It was the unbridled government money printing that caused previous episodes of high inflation in 2011-2013 and 2017-2019. This time around, the government borrowing from SBP is zero for the last 3 years. It is the record high international prices of energy, food and other commodities combined with rising freight costs that have led to inflation rising to 12% in Feb 2022. However, inflation is not just a Pakistan specific problem, inflation in the US, the UK, the EU and emerging markets is the highest in three decades.
As a result, Pakistan authorities have taken unprecedented relief measures to shield the most vulnerable households. The government has reduced taxes on all petroleum products to 0% and frozen prices at the pump to shield consumers. As a result, the domestic consumers are paying Rs150/litre on petrol compared to Rs187/litre in Bangladesh and Rs244/litre in India. Similarly, households and commercial users have been provided relief on their power consumption by a Rs5 per unit reduction in their bills. An estimated Rs 300 billion relief has been provided to the masses to shield them from the rising international energy prices.
As a result of relief measures taken by Pakistan, inflation is likely to decline in the weeks ahead. The latest weekly SPI data shows a 1.4% decline in the index, the first weekly decline in over 7 weeks as a direct result of the relief measures taken by the government.
In the end, we want to assure the newspaper and the public at large that the PTI government is doing everything in its power to steer the economy towards a sustainable and inclusive growth path. We stand ready to take further actions as and when needed, while ensuring protection of the vulnerable segments of the society.
Copyright Business Recorder, 2022
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