Conflicting indicators

The economy is in a state of transition from the deep recession during March to June 2020 after COVID-19 to a phase of recovery. The second attack of the pandemic has made the revival of different parts of the economy more difficult. The consequence is that there are mixed and conflicting signals from different economic indicators. Some of these contrasting developments are discussed below.

The first perhaps strongest indicator of a successful comeback is the double-digit growth of the Quantum Index of Manufacturing (QIM) in December 2020 of over 11 percent. For the six months period, July to December 2020, the growth rate is over 8 percent. But there is a problem here. The growth rate is exaggerated by a depressed level of the QIM in the first half of 2019-20, even prior to COVID-19. If we go back three years to the first half of 2017-18 it is perhaps disappointing that the growth rate in 2020-21 of the QIM is not so large at only 3 percent after three years. Therefore, the large-scale manufacturing sector will have to demonstrate more buoyancy before the conclusion can be reached that there has been a strong and sustained recovery.

There is also a problem in determining the performance of exports. The two primary sources of information on exports, the SBP (State Bank of Pakistan) and the PBS (Pakistan Bureau of Statistics), are pointing in different directions. According to the PBS, exports of goods have gone up by 5 percent but the SBP numbers indicate that exports have fallen by 5 percent. This is unusual. Generally, they point in the same direction although the growth rates may differ. For example, in the first half of 2019-20, the PBS reported a growth rate of 4 percent and the SBP a growth rate of 3 percent. There is need for reconciliation of the export numbers in the first half of the on-going financial year.

The other part of the economy where the trend is still unclear is private investment, as measured by the import of machinery, excluding power generation machinery and mobile phones. For the period, July to December 2020-21, the PBS presents a depressing picture with a fall of 22 percent in imports of machinery. As opposed to this, the SBP reports a growth rate of 3 percent.

The lack of clarity on the performance in private investment is further increased by the numbers of credit to the private sector. Apparently, there has been a strong response to the special post-COVID financing of investment scheme of the SBP. Loans of Rs 374 billion have been approved under this scheme. But conventional access to credit by the private sector from commercial banks has increased by only 4 percent. Given the higher rate of inflation, this implies that the flow of credit has declined in real terms.

Turning to the key broader indicator of economic growth there are conflicting signs here too. A huge fall in cotton output of over 34 percent and a modest increase in other major crops imply that the major crop sector of the economy is likely to show negative growth of over 4 percent. This will have an inevitable impact on production and exports of the textile sector and activity in other sectors linked to agriculture. Combined with an impending gas shortage and big hike in electricity tariffs it is increasingly unlikely that the GDP growth rate in 2020-21 will exceed 2 percent, unlike the optimism shown by the SBP.

There is also some ambiguity in the trend in the rate of inflation. The CPI has shown a declining rate of inflation. It was 9.3 percent in July 2020, which fell modestly to 8 percent by December 2020. The good news is that it fell sharply to 5.7 percent in January. Contrary to the trend in the CPI, the WPI has shown a rising trend during this period of July 2020 to January 2021. It has doubled from 3.2 percent to 6.4 percent. Now, the WPI is rising faster than the CPI.

The inconsistency is revealed clearly by looking at the rate of inflation in food, beverages and tobacco. It is reported at 7.2 percent by the CPI but as high as 12.6 percent by the WPI. Either the retailers are absorbing part of the increase in wholesale prices or the rate of inflation is significantly higher than that reported by the CPI.

There is also some other evidence that the CPI understates the rate of inflation. The largest item in the consumer basket is housing rent. It has risen by less than 5 percent when the inflation rate has averaged 8 percent during the period, July 2020 to January 2021. Given the large rural-urban migration and a housing shortage of over 3 million units, it is inconceivable that there would be relative price stability in the residential housing market. An unbiased estimate of the rate of increase in housing rents could raise the overall inflation rate by up to 1 percentage point.

The other striking example of an understatement of the rate of inflation is in the case of medicines. The PBS blithely estimates it at below 7 percent. The common perception is that prices have gone up manifold. Similarly, transport charges are reported by the PBS as having fallen by almost 2 percent in January, when POL prices have increased by almost 5 percent. Further, electricity tariff on average for domestic consumers has apparently declined by 4 percent on a year-to-year basis in January 2021. The fuel adjustment charge has been increasing in recent months and it is highly unlikely that the overall electricity tariff could have fallen.

Another indicator with contrasting signals is the growth rate of home remittances. They have shown handsome growth of 25 percent in the first six months and contributed thereby to the generation of a current account surplus. However, the month of December 2020 has seen a fall in the growth rate to 16 percent. The flow from different sources is now showing a big variance. Home remittances from the Middle East were rising in the first five months by 17 percent but in December the growth rate has plummeted to less than 4 percent. Fortunately, remittances from the USA, UK and EU countries have retained their buoyancy with a sustained growth rate of over 40 percent. The source of concern is that 60 percent of the remittances are from Middle East countries and this could lead to a slowdown eventually in remittances.

Overall, there are mixed signs on many fronts. The economy will have to be watched intently on a month-to-month basis and appropriate policy actions taken. Hopefully, the picture will change and the economy will get on to a robust and higher path of growth.

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

Copyright Business Recorder, 2021