Mixed economic trends

The first five months of 2023-24 have witnessed upturns and downturns both globally and within Pakistan. There was earlier some evidence that the world economy was on the recovery path, but more recent happenings, especially the conflict in the Middle East, have begun to change the course towards a global recession. A prime example of this is the big drop in the international crude oil price from $93 per barrel in end-September to $74 per barrel now.

The start of 2023-24 for the economy of Pakistan was characterized by serious concerns about the vulnerability to a default in external payments. Foreign exchange reserves had plummeted to barely $4 billion, not enough to provide import cover for even one month.

Fortunately, the new IMF Stand-by facility of $3 billion for nine months was finalized by mid-July. This led to an inflow of the IMF installment of $1.2 billion and deposits of $2 billion from Saudi Arabia. Reserves nearly doubled and the rupee acquired a newfound stability in subsequent months. The month of November has witnessed the successful completion of the first review of the Stand-by Facility by the IMF.

There is a need to first examine the process of growth in the national economy since June. The PBS (Pakistan Bureau of Statistics) has recently revised the GDP growth rate in 2022-23 from 0.30% to negative 0.17%. This is clearly a reflection of the large negative impact of the floods and the constraints exerted on industrial growth by the physical restrictions on imports.

The PBS has finally proceeded to make estimates of the growth rate in the economy on a quarterly basis, after an understanding with the IMF. This will certainly facilitate faster policy responses and lead to an improvement in the process of economic management by the relevant ministries.

The PBS must be congratulated for having constructed a quarterly GDP series by sector from 2016-17 onwards. However, only the quarterly growth rates have been released and not the level of value- added in different sectors of the economy. Consequently, the PBS has not revealed the seasonal variation in the level of economic activities in Pakistan. We hope that this will be done in a subsequent publication.

The overall GDP growth rate in the first quarter of 2023-24 has been estimated at 2.17%. This is disappointing, given the low base effect of negative growth last year. The major crop sector has shown a big recovery, due to big increases in cotton and rice outputs in the Kharif season. Last year, the floods had inflicted a big damage on these crops.

The large-scale manufacturing sector has demonstrated only a minor recovery of 0.93% from the decline of 10% in annual value-added in 2022-23. Similarly, the services sector is in a sluggish state with a growth rate of only 0.82%. Two sub-sectors, namely, finance and insurance and public administration and social security have actually shown big negative growth rates of 12.8% and 16.7%, respectively. Overall, there has been only a weak process of recovery in the economy in the first quarter of 2023-24.

Turning to the rate of inflation, the trend here continues to be worrying. On a year-to-year basis the Consumer Price Index has shown an increase of 29.2% in November, as compared to 26.8% in October and 31.4% in September. Overall, the five-month average rate of inflation is 28.6%.

There are big doubts clearly about the likelihood of the rate averaging 21.9% over the twelve months of 2023-24, as per the government projection. This will require that the average rate falls to 17% only in the last seven months of 2023-24.

Why has there been a rise in the rate of inflation in November? This is largely due to the unprecedented hike in the gas tariff for the first income quintile by 520%. This alone has raised the rate of inflation by over 4.5% points in the case of urban consumers. Therefore, it is not surprising that the big rise of the rate of inflation in November is in urban areas of Pakistan. It has fallen somewhat in rural areas.

There is also evidence of understatement of the rate of inflation by the PBS. The first understatement relates to the increase in the gas tariff. As highlighted above, it has been reported at 520% in the November CPI. However, the weekly SPI of 30th November reports it at 1109%. This alone will raise the rate of inflation in the urban CPI by almost 6 percentage points.

Second, the PBS continues to underreport the rate of increase year-to-year in housing rents at only 5.6%. This is at a time when construction activity is down and there is an emerging big shortage of housing, especially in the large cities. Further, construction costs have increased by over 18%. If the rate of increase in rents is close to the rise in construction costs, then this will add another 2.2% points to the rate of inflation in the CPI.

There is also a big slump in private investment. The absence of growth in the economy and the record high level of interest rates have led to a decline in credit to the private sector. The imports of textile machinery, construction machinery and other machinery are down by 75%, 9% and 19%, respectively.

Turning to the state of public finances, the good news is that FBR revenues and the petroleum levy are showing high growth rates close to the targets. However, there are two areas of concern. First, the provincial cash surplus as of 24 November is only Rs 41 billion when the annual target is Rs 650billion.

Second, the transfer of SBP profits to the Federal Government is expected to treble in 2023-24 and reach the peak level of Rs 1103 billion. However, as of the 24thof November the increase is only 30%. Third, net government budgetary borrowings have exceeded Rs 2000 billion as compared to Rs 13 billion only on the 25th of November 2022.

Finally, there is a need to look at the state of the external balance of payments in the first four months of 2023-24. Thanks to the injection of funds in the immediate aftermath of finalization of the IMF Stand-by Facility, the foreign exchange reserves of the SBP stand at $7.2 billion.

However, they have declined in the last four months by over $1 billion and are already significantly below the target level of reserves at the end of 2023-24 of $9 billion.

The month of October has revealed a significant weakening in the overall balance of payments position. The current account deficit has been small due especially to a lower level of imports. The bad news is that the financial account has gone into a deficit.

The primary reason is the drying up of inflows of external assistance into the government account. Consequently, the amortization of external debt has exceeded the disbursements. If this continues in the coming months, then the foreign exchange reserves will come under severe pressure. The IMF has already expressed its concern in this regard.

Overall, the first five months of 2023-24 have witnessed a mixed performance by the economy. The process of recovery is still mild and the GDP growth rate in the first quarter is only 2.2%. Private investment has declined sharply. The rate of inflation shows no inclination yet to come down. Perhaps the most worrying trend is the increasingly fragile nature of the external balance of payments position of Pakistan.

Copyright Business Recorder, 2023