Signs of recovery

ARTICLE: There is a lot of optimism about the economy today. The Prime Minister has said that the economy is at the 'tipping point'. Various Ministers and Advisors have highlighted positive short-term developments. References have been made to the buoyancy of exports, remittances, FBR revenues and the stock market.

There are indeed grounds for optimism. Pakistan is one of the few countries that have successfully contained the spread of COVID-19. The number of cases has visibly flattened out. Consequently, there has been widespread easing even in the smart lockdown. Under these changed conditions, the economy has been given a chance to breathe once again. Consequently, the process of recovery has commenced. There are, however, some important concerns. Most of the developed countries like USA, Japan, UK and EU countries continue to be ravaged badly by COVID-19. The UK has apparently seen a loss of employment of 20 percent and the USA of over10 percent. Japan's GDP has fallen by as much as 25 percent. Similarly, the Middle East countries continue to be hit by the plummeting in the price of oil to $45 a barrel, a fall of over 30 percent in relation to the price prevailing at the start of 2020. Oil revenues have fallen sharply and large budget deficits have emerged. Consequently, countries like Saudi Arabia are cutting back on construction spending. A large number of expatriate workers from countries like India, Bangladesh and Pakistan are being compelled to return to their home countries. The poor state of the global economy has led to dire predictions of economic trends for the remainder of 2020 and the earlier part of 2021. WTO expects global trade to remain depressed by over 20 percent, while World Bank has projected a global decline in remittances also of 20 percent.

How then have exports in July 2020 shown a high growth rate of 25 percent with respect to the previous month and of 6 percent in relation to the corresponding month in 2019?In particular, textile exports have shown exceptional buoyancy, with growth rate of 33 percent in relation to June 2020 and 14 percent with respect to June 2019. There is need to recognize that in the case of many textile items the growth has been achieved on the back of significantly higher export prices in comparison to the pre-COVID level in July 2019. Prices of exports of cotton cloth, knitwear, bedwear, tents, readymade garments and art silk and synthetic textiles have risen by 30 percent, 6 percent, 18 percent, 4 percent, 76 percent and 32 percent respectively.

The remarkable finding is that despite a depressed global market the prices of exports of Pakistani products have generally gone up sharply. Is this a reflection of the extra ordinary marketing skills of our textile exporters or is there some accumulated payment of past orders or even some over invoicing of exports? It is perhaps too early to fully understand the reasons for the higher prices. This upsurge in prices is also not limited only to textiles.

Turning to the inflow of remittances, there has been an unprecedented increase in July 2020 of 37 percent in relation to the level in July 2019 and of 12 percent with respect to the previous month. Despite the big slowdown in Saudi Arabia and the UAE, remittances from these countries have jumped up by 75 percent and 26 percent in relation to July 2019. What explains the buoyancy in this inflow? Is it due to special factors like a transition of the flow towards officially banking channels or of remittance home of accumulated savings by returning workers or something else? Here again there is need to investigate the reasons for this positive outcome and assess whether it will be sustained or not.

The other positive news is the success of FBR in not only meeting its target for July 2020 but also in reaching the level of Rs 300 billion when the industrial sector, in particular, has been in a state of deep recession. The month of July 20 usually contributes about 6.5 percent to the annual revenues of FBR. The target for 2020-21 is Rs 4953 billion. Accordingly, the target for July 20 ought to have been close to Rs 320 billion. As such, the collection of Rs 300 billion is actually somewhat below target. There is also the likelihood that the FBR field tax collection staff has become more active following the relaxation of restrictions and / or revenues collected also include the backlog of revenues that could not be paid or collected since March 20 when the incidence of COVID-19 was rising sharply.

Reference has also been made to the buoyancy of the stock market. The KSE 100 index stood at close to 42000 at the end of February 2020. It now is at almost 40000, implying that the process of recovery has not yet been completed. The rate of increase has significantly increased after mid-June 2020. It is indeed a vote in favor of the future prospects post-COVID-19 of profitability in the corporate sector of Pakistan. However, the precipitous fall in interest rates after March 20 would have led anyway to a diversion of funds to the stock market. It remains to be seen when the KSE Index will go beyond the pre-COVID-19 level.

Overall, the positive signs in the economy are very encouraging. However, there is need to study the reasons for the improvement, especially in the case of exports and remittances. We hope that the process of recovery will be sustained and the economy will rise above the pre-COVID-19 level soon. This will begin to ameliorate the condition of a large number of families who have been hit by unemployment and rising prices.

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

Copyright Business Recorder, 2020