The government is claiming a rise in productivity as a measure of the success of its policies specifically designed to mitigate the negative fallout of the Coronavirus; and has cited a rise in textile export orders, prompting industrialists to request setting up of training facilities to cater to their needs for skilled labour, higher cement sales reflective of the success of the April 2020 construction industry-specific incentives (including an amnesty scheme which will expire 31 December 2020) and a spike in auto sales.
For the general public the good news as per the government is job opportunities due to the rise in productivity and a decline in inflation particularly a decline in sugar prices – a feel good factor that may have eroded due to the recent rise in fuel prices likely to impact on the general price level.
Textile exports have risen from 4.6 billion dollars July-October 2019 to 4.8 billion dollars in the comparable period of 2020 on the back of some Covid19 specific cabinet/State Bank of Pakistan (SBP) decisions that include: (i) reduction in interest rates by 625 basis points beginning March 2020, (ii) refinancing of wages to prevent layoffs for six months; (iii) deferral of repayment of principal amount; (iv) long term financing facility; and (v) market-based exchange rates. Only two out of these five measures reflect out of the box thinking as previous administrations, including the Nawaz Sharif government, followed similar policies to encourage business activity. The two exceptions are: (i) refinancing wages, a good policy designed to forestall business closures due to the lockdown – a policy spearheaded in the West, and (ii) market-based exchange rates that accounted for an undervalued rupee (no doubt to discourage imports and thereby to contain the current account deficit though this was clearly at the cost of domestic productivity and employment).
What is not acknowledged in the feel good factor of the recent rise in textile exports is that after 12 May 2019 the economic team leaders began to implement severely contractionary monetary and fiscal policies as a component of their agreement with the International Monetary Fund (IMF) on behalf of the people of Pakistan. This agreement accounted for the projection of a historically low growth of 1.5 percent (well before the onslaught of Covid-19) based on a discount rate of 13.25 percent, an undervalued rupee and an unrealistically high 5.5 trillion rupee fiscal target. Post-Covid-19 the SBP was compelled to lower the discount rate four times since March, current level is 7 percent (considered too high by economists and the business community), the rupee gained value but remained under valued till October (the November data has not yet been uploaded on the SBP website) and while taxes were not raised in the 2020-21 budget yet the budgeted revenue of 4.9 trillion rupees projected as unrealistic by relevant officials is reportedly targeted to appease IMF concerns.
The recent gains associated with the textile sector need to be seen in the context of an extremely relevant concern voiced by some cabinet members during the request to ratify the Economic Coordination Committee decisions with respect to the concessionary regime of electricity, RLNG and gas for export sectors: notably that the export sectors have been receiving such incentives for decades without the necessary evaluation study to indicate their success or otherwise. This prompted it to pledge to undertake an audit of the impact of these incentives and one would sincerely hope that this audit is expedited as the cost of these incentives is being borne by the taxpayers.
Be that as it may, data recently released by the Pakistan Bureau of Statics (SBP) notes that in July-October textile sector (with the highest weightage of 20.9) grew by 0.22 percent in 2019 and 2.24 percent in the comparable period this year. Other major gainers in the first four months of the current year compared to the comparable period last year were pharmaceuticals (from negative 10.25 percent last year to plus 13.53 percent this year no doubt on the back of the government’s decision to allow higher prices in September 2020 because of pharmaceutical companies inability to provide medicines at the same controlled rates that ignored the significant rise in their input costs), and food, beverages and tobacco (weightage 12.3) from negative 8 percent to positive 12 percent. Sadly, this rise in LSMI in food, beverages and tobacco still accounted for a rise in food inflation in double digits.
Construction industry, the government’s economic team claims, has received a tremendous boost due to its April 2020 measures that include: (i) amnesty scheme for investment in this specific sector, (ii) grant of an industry status, (iii) 30 billion rupee subsidy to the Naya Pakistan Housing Programme though reports indicate that this has not yet taken off, (iii) tax on land and construction to be levied on the basis of per square yard and per square foot of property and paid evenly over the life of the project, (iv) withholding tax waived off for construction sector except steel and cement, (v) lower sales tax on construction to 2 percent through consolidation of all taxes after coordination with three provinces excepting Baluchistan.
The Large Scale Manufacturing Index (LSMI) recently released by the Pakistan Bureau of Statistics does not focus on a rise in cement though it notes that non-metallic mineral products (which include cement, glass, ceramic, lime, bricks, tiles, sanitary ware and consumer products such as table ware) grew by 22.88 percent as opposed to only 0.4 percent in the comparable period of the year before. Weightage of this item in the LSMI is only 5.3 hence its impact on the manufacturing sector is limited. Nonetheless Prime Minister Imran Khan, in a recent interaction with the media, noted the tremendous rise in cement sales reflective of a boom in the construction sector. The Finance Division substantiated this claim and shared data with the media that was compiled by the All Pakistan Cement Manufacturers Association (APCMA) in which the July-November figures for 2021 showed a growth of 16.8 percent year on year in 2021 over the comparable period last year when growth was 5.24 percent (due partly to the contractionary policies being implemented in 2019).
The Finance Division failed to highlight/address four elements that can be easily gleaned from the data it shared with the media as well as reports: (i) the percentage rise in cement dispatches in July 2020 was 4.65 percent), in September 48.10 percent, and in October 9.92 percent; however in two months out of the five (40 percent of the time under review) cement dispatches suffered a massive decline notably in August 2020 by 27.24 percent and in November 2020 by 21.29 percent month on month; (ii) exports of cement declined to 766,273 tons in November 2020 against 806,521 tons in November 2019 with APCMA stating that ‘’this is the first instance of decreasing exports during this fiscal which otherwise was on the rising trend.” Exports however rose by 21.54 percent between July-November 2020 to 4384 million tons against 3607 million tons in 2019; (iii) a recent report by the Competition Commission of Pakistan concluded that there is collusion in setting the price of cement which is to the detriment of the general public; (iv) and a Business Recorder survey indicated that the bulk of cement sales are due to the ongoing construction of three dams – Suki Kinari, Dasu and Kroot with no clarification received from the government. This raises questions about who is actually spearheading cement sales – the government or the private sector which raises questions about the efficacy of the amnesty scheme and one would hope enable the government to take a more informed decision with respect to demands for an extension of the scheme; and finally (v) Iron and steel products used in the later stages of construction registered negative 14.9 percent in July-October 2019 to negative 5.4 percent in the comparable period this year.
Automobiles contrary to statements by the cabinet members registered negative growth of 1.62 percent July-October 2020-21 against negative 36.88 percent in the comparable period of the year before. Thus the less contractionary policies post-Covid19 have arrested the decline but it is still in negative territory.
To conclude, there is undeniably a pick-up of economic activity in recent months though without any evaluation study it is unclear whether this is attributable only to the post-Covid19 policy measures taken by the administration and/or to a pick-up in international demand as competing countries like India are suffering from a productivity decline due to the Covid19. However, the most important question of all today is whether the economic team leaders would be able to convince the IMF that the ongoing less contractionary policies must continue to enable the government to deal with the second Covid19 wave as failure to do so may, at best, delay and, at worst, suspend the ongoing negotiations on the second mandatory IMF staff review. This in turn would lead to the financially untenable position of a cessation of concessional bilateral/multilateral loans thereby increasing reliance on expensive loans from commercial banks and equity borrowing.
Copyright Business Recorder, 2020
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