Current economic trends

ARTICLE: Six months have elapsed since COVID-19 first hit Pakistan. This is an opportune time to get, more or less, a precise assessment of the negative impact of the pandemic. Since the end of July, the incidence of COVID-19 curve has flattened out. Therefore, an initial assessment can perhaps be made if the economy is beginning to recover and if so at what rate.

Unfortunately, the latest trends in the real sector of the economy are not available. The last published data on the Quantum Index of Manufacturing (QIM) is of June 2020. This highlights a problem which has become evident after COVID-19. The short-term economic monitoring system in the country is weak. This has reduced the ability to respond quickly and effectively to any negative shock. Henceforth, the lag in the release of information, for example, on industrial production must not exceed one month.

The June 20 growth rate in the QIM was 16.8 percent with respect to the level in May 20. This indicates that the process of recovery by the sector had commenced. However, it fell by 7.7 percent in relation to the output level in July 19. Therefore, the process of recovery has to proceed further before the pre-COVID-19 level of production is attained.

There is more up-to-date information on individual sectors of the economy as measured by the use of inputs. Cement consumption went up by 38 percent in relation to the previous month but fell by 27 percent in August. Therefore, the trend in construction sector activity is still unclear.

A similar ambiguity exists in the transport sector. On a month-to-month basis imports of petroleum products fell by 8 percent but are substantially higher than the level in July 2019. Similarly, imports of raw cotton fell by almost 50 percent in July 2020 compared to the previous month. However, they are significantly higher than the imports in July 2019. As such, the trend in the textile sector is also unclear.

Turning to what's happening to investment, the level remains depressed as measured by the import of machinery. It fell in July 20 by 25 percent in relation to the previous month and by 17 percent with respect to July 19. This is perhaps not unexpected as the investment lag tends to be long in response to a big negative shock.

This is also confirmed by the inflow of foreign investment, both direct and portfolio. It was $107 million in July 20 as compared to $182 million in June 20. In fact, foreign investment has fallen to a low level. It was almost two times higher in July 18.

There is also no system for monitoring the short-term trend in employment. This is possible in developed countries based on the number of unemployment claims. There is only one indicator and it may well be imperfect. This indicator is the growth in the wages of construction workers, included in the Consumer Price Index. According to this indicator, the nominal increase in wages in July and August combined is close to 6 percent as compared to the corresponding period of the previous year. This implies that with the rate of inflation close to 9 percent, there has been a 3 percent decline in real wages. Therefore, it is likely that the volume of construction activity remains somewhat low, despite an incentive package announced by the government.

There is fortunately a strong monitoring system on the short-term trend in prices. The Sensitive Price Index is available on a weekly basis. According to the monthly CPI, with base year of 2015-16, the year-to-year rate of inflation has declined from 9.2 percent in July 20 to 8.2 percent in August 20. The decline is due entirely to the big fall in the rate of increase in food prices from 17.8 percent in July 20 to 11.3 percent in August 20. Hopefully, the downward trend will continue and the country will experience only single-digit inflation in 2020-21.

Short-term developments in the external balance of payments are of fundamental importance in the context of the global impact of COVID-19. The expectation generally of multilateral agencies is that world trade could fall by 20 percent, remittances by over $100 billion and foreign capital flows to developing countries could also decline significantly. The question then is what is likely to be the impact of these adverse global developments on Pakistan?

The SBP has released the statistics on the balance of payments for July 20. Another two weeks will be required before the numbers for August 20 become available. The balance of payments in July 20 has an ambiguous trend. The government has already highlighted that the current account was in a surplus in July 20. However, a focus on the overall balance of payments position reveals that this has significantly deteriorated. The surplus in the financial account has declined by 77 percent in relation to June 20 and by 90 percent with respect to July 19. The result is that the balance of payments surplus in July 20 was only $241 million as compared to $1854 million in June 20 and $751 million in July 19. This highlights the vulnerable external position of Pakistan and is a note of caution on the optimism shown by the government.

Exports showed buoyancy in July 20. However, they have fallen by 15 percent in August 20 in relation to the level in August 19. Therefore, here again there is no ground yet for expecting a surge in exports in 2020-21. There is the risk that in light of decline in global trade, total exports this year may not exceed $20 billion.

Fortunately, imports have shown a consistent declining trend. They fell by 1 percent in July 20 and by almost 12 percent in August 20. Consequently, the deficit in the balance of trade in the first two months of 2020-21 is down by 8 percent.

The first indications about remittances are contrary to the global projections. The month of July 20 has seen a big 37 percent increase in relation to the level in July 19 and over 12 percent with respect to the previous month. The entire increase in the inflow is from the Middle East. However, remittances from the US have fallen by 12 percent.

Overall, many of the current trends in key macroeconomic indicators are somewhat ambiguous in character. We await the data in particular on the QIM in July 20, the balance of payments in August 20 and details of commodity-wise composition of exports and imports in August 20. Hopefully, the process of recovery will be clearly visible soon and the economy will revive to the pre-COVID-19 by early 2021.

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

Copyright Business Recorder, 2020