Mixed economic trends

The economy is in a state of flux and on the path of recovery after the Covid-19 attacks. This has led to some contradictions at this stage in the direction or pace of movement of various economic variables. This may be due either to continued specific weaknesses versus general improvements in the economy and should cease once the economy moves firmly on to the path of relatively high growth. Alternatively, there may be some measurement problems in the quantification of various economic indicators. These contradictions are highlighted below:

The first relates to the contrasting trends in the rate of inflation. The Consumer Price Index (CPI) has shown a decline in the rate of inflation while it has gone up sharply in the case of the Wholesale Price Index (WPI). Since April 2021, the rate of increase in the former index has declined from 11.1 percent to 9.7 percent in June. However, it has gone up during the corresponding period in the latter case from 16.6 percent to 20.9 percent.

The concern relates both the divergence in the recent trends and to the huge gap between the current rates of inflation in the CPI and the WPI, respectively. For example, the Consumer Price Index of food, beverages and tobacco items has increased by 10.5 percent in June, whereas the wholesale prices in the month of these items have risen by over 16 percent. Does this confirm the view of the government that there are monopolistic elements at the wholesale level as opposed to much greater competition at the retail level? Is there a likelihood that higher wholesale prices will eventually be transmitted to higher retail prices?

The other apparent contradiction is with the growth rate of private investment. There is a common perception that after the slump following the first Covid-19 attack there has been a big improvement in the level of investment. The SBP introduced attractive financing packages for sustaining economic activity and promoting investment. In particular, the Temporary Economic Refinance Facility (TERF), a concessionary scheme, was put in place aimed at promoting both new and BMR investment. The increase in the overall flow of credit to the private sector, as reported by the SBP, has more than trebled in 2020-21.

However, there is a big contradiction. In the National Income Accounts released by the PBS, private investment at constant prices is reported to have declined by 1 percent in 2020-21, even in relation to the depressed level in 2019-20 after the first Covid-19 attack. Investment in manufacturing is reported to have increased by only 1 percent while there is a decline in the construction sector of over 24 percent. This is a sector which is perceived as experiencing a veritable boom due to the liberal fiscal incentives provided after the first Covid-19 attack. Unless, private investment acquires a strong momentum, the process of recovery of the economy cannot be said to be fully underway.

The next contradiction relates to the bumper crops of wheat and sugarcane. Output of wheat has increased by 8 percent to a record level and of sugarcane’s by as much as 22 percent. But then why have imports of wheat and sugar continued in large quantities? The Economic Coordination Committee (ECC) of cabinet has recently approved the import of as much as three more million tons of wheat.

Another big contradiction relates to developments in the foreign exchange market. The rupee has started depreciating in the last few months. The inter-bank rate was Rs 152.54 per US$ in end-March. As of Friday, 10th of June, it had fallen to Rs 159.50 per US$, a significant fall of over 4.5 percent. This has happened at a time when foreign exchange reserves have risen by as much as 28 percent to a high level of $17.3 billion. Why is there still a lack of confidence in the value of the rupee? Is there an anticipation of a rising current account deficit due to the recent hump in imports and/or concerns about the future of the International Monetary Fund (IMF) Programme and increasing difficulty in meeting the foreign exchange requirements in 2021-22?

There are also mixed signals regarding the GDP growth rate in 2020-21. The wholesale and retail trade sector is the largest sector in the economy with a share of over 18 percent in the GDP. Apparently, it has shown an extraordinarily high growth rate of 8.4 percent in 2020-21. This has contributed over 38 percent to the GDP growth. But the data on electricity consumption in the latest Pakistan Economic Survey reveals that sales to commercial consumers have fallen by over 1 percent in the first nine months of 2020-21. This is the first time that there has been a fall in electricity consumption by commercial consumers after 2011-12. This casts serious doubts about the high growth rate of the wholesale and retail trade sector in 2020-21 and thereby also on the reported GDP growth rate in 2020-21.

The last major issue relates to the exceptionally high growth rate in real household final consumption expenditure in 2020-21. It is reported at 7.4 percent by the PBS. This magnitude is derived as a residual in the national income accounts. If the growth rate is very high; this is the first indication that the GDP estimate from the supply-side of the value added by different sectors of the economy is overstated.

However, the government has argued that the consumption boom is due to the enormous growth in home remittances. But the 30 percent growth in remittances, even if fully consumed, is equivalent to 3 percent of the GDP, as they are equivalent to approximately 10 percent the income generated in the domestic economy. Therefore, the implication is that there has also been a healthy growth in consumption expenditure by households who are not recipients of home remittances of almost 5.5 percent. This is unlikely given the higher level of unemployment and poverty after the Covid-19 attacks. Consequently, this is another reason why there is a perception that the GDP growth rate in 2020-21 has been overstated.

The above inconsistencies to the extent that they relate to problems of measurement should be resolved by the PBS. However, there is also the likelihood that since the economy is in a state of transition, there could be mixed signals conveyed by different indicators. Hopefully, as the economy moves strongly on to a trajectory of high economic growth rate there will be greater consistency among trends in the national economy.

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

Copyright Business Recorder, 2021