Early signs of recovery

ARTICLE: Many economists and analysts have claimed gloom and doom in the aftermath of Covid-19 and exchange rate rates adjustments. The policy of targeted subsidies over blanket is reaping fruits, and more actions are needed in that direction. Early signs of demand surge are already visible for rural economy and low-income urban segments. The fiscal stimulus (in response to Covid-19), and market-based exchange rate are generating economic demand faster than many anticipated. The impact of monetary stimulus (lowering interest rates from 13.25 to 7 percent) may show itself with a lag - historically, it takes 6 to 18 months to do so. If the decline in Covid-19 cases sustains, urban demand is likely to pick up in due course.

Data suggests that rural economic demand is on a surge. Wheat procurement is a leading indicator. This year procurement (6.6 mn tones) is at record high and at a better price. Most of the farmers got full price and procurement was at a wider scale. Farming sector received an estimated cash injection of Rs231 billion this year which is Rs100 billion higher than last year. The story of sugarcane growers is similar, who are also receiving better prices. Lately, ex-farm milk prices are growing too.

These trends have generated demand for next season's inputs and have supported consumption-led demand. Urea consumption of 1.2 million tons in June is record high. Soon, the demand of automobile may also emanate from rural economy. A similar phenomenon happened in 2009-11 when the wheat support price was increased by 50 percent in a go. But at that time, process was not as robust, and big players were the main beneficiaries.

Now market mechanism is working. Exchange rate adjustment has benefited farmers in terms of product prices. Cost structure has managed to improve farmers' margins. Government has given support for inputs - as urea prices are down due to removal of GIDC. Availability of electricity is reducing farmers' reliance on diesel. Barring pesticides, price increase in almost all agri-input is proportionately less than increase in output prices. This has boosted the farm economy. Ehsaas programme disbursement is also better than expectations. Rs145 billion has successfully been transferred to 12 million low income households. The impact will be much higher than the amount. Think about demand generation by doling out Rs150 billion to a dozen seths versus 12 million poor. Larger the number of beneficiaries, higher the impact. That is why wealth distribution is so important for generating inclusive growth.

Talks with textile players suggest that there is significant pick-up in demand of fabric and suiting (shalwar qameez) catering to low and lower middle-income segments. Some players are planning expansions to meet growing domestic demand. This is in sharp contrast to high-end urban textile demand. Urban rich and upper middle class are not stepping out due to fear of Covid-19 and there is little demand for wedding/party related clothes and jewelry shopping. It is not that people cannot afford these anymore. This demand is inversely linked to the Covid-19 cases.

Even in exports, there is a surprising surge in home textile and home wearing clothing. For instance, demand for T-shirt and PJs is picking up. People are upgrading home textile while sitting at home. The slump is in garments and denim. The dent is bigger for countries such as Bangladesh where virtually all the eggs are in garments' basket, while it is returning close to normalcy for Pakistan.

SBP's support to businesses by deferring loan principal payments and providing salary loans at subsidized rates has kept liquidity problems for many businesses at bay. One textile player privately notes that because of SBP salary loan scheme, factories have remained operational even during days of low demand, and in June all inventories were replenished due to pick-up in both domestic and export demand.

The automobile players are also confident about 2021. Two wheelers' demand is already back - as per industry estimates, motorbike demand (estimated at 180,000 units per month) is now better than pre-Covid-19 days. A leading car assembler is confident that 2021 would be a year of strong revival. Historically, car sales have had a strong correlation with low interest rates. Banks and car assemblers are designing products in partnership to lure customers.

Another immediate economic stimulus will generate from PM's housing and construction package. A doable model has been designed with risk participation by builders and banks and subsidy to end-consumers. Housing assets through mortgage financing is a proven mechanism to transfer wealth from rich to middle class in the world. The housing growth spurt will generate more demand. Cement demand is already normalizing.

The PM is adamant on building housing for very low-income segments; a segment in which bankers and developers were initially reluctant to venture into. The credit goes to the PM for making things possible for large pool of poor through housing, Ehsaas programme, and support extended to agriculture. This can be a game changer. But there is still a long way to go.

The key is to have targeted subsidies. The government should use technology and digital infrastructure to make this possible. Government needs to do away with blanket subsidy to 70 percent of domestic electricity consumers. This must be routed through Ehsaas programme to restrict it to the deserving lot.

In a nutshell, the domestic demand stimulus is working. There are disruptions in domestic and international value chains due to Covid-19. The urban demand is constraint as well. Once things normalize and the impact of monetary easing becomes evident, there could be pressure on current account due to surge in imports. The country's foreign reserves have also inched up but have yet not reached a comfortable level. The energy circular debt problem is far from any resolution.

Without fixing energy mess, any recovery would be short-lived. And with excess fiscal and monetary stimulus, the life of high demand could be of weak magnitude. That is why it is not advisable to go for any further monetary easing. SBP is working hard on targeted interest subsidy - it should continue that. The energy and finance ministries should focus on coming up with a doable plan for energy circular debt reduction. And more importantly, the country needs IMF support till the time it is self-sufficient to attract market based foreign flows to finance current account gap.

The key is to build exports and enhance manufacturing base in the country. For that to happen, interest rates are not the barrier. Despite low rates, there was little long-term expansion (barring cement and steel) in the last regime. Banks credit is largely for working capital. Private sector credit to GDP ratio has declined during the last decade while public debt is up. This inefficient allocation of capital must change. Industrialists are ready to invest - SBP is offering better rates for long term financing. Banks are flooded with liquidity. The caveat is to come up with a mechanism to get energy (mainly power) at competitive rates for medium to long-term.

Copyright Business Recorder, 2020