“I have noticed that Pakistanis are emotional. When things don’t go very well, in terms of politics or economy, they get very frustrated. The other side of the same coin is that when things start to go positive, they also get more positive”, aptly observed Wille Earola, Pakistan Honorary Counsel General to Finland in an interview to BR Research. 
The statement fits in well to see the mood swings amongst various stakeholders on economic performance in the past few years. The economic boom started in 2015-16 was well received by both investors and consumers; as soon as the growth surpassed 4 percent in FY15 amid single digit inflation, the confidence boosted.
The CPEC was signed, energy projects started rolling in and the security situation improved considerably. Everyone was bullish; returns from stock market and real estate markets were phenomenal in dollar terms. Pakistan stock market was one of the best performing market where virtually all the investment was domestic.
Businesses went into expansionary face along with government invested heavily in mega infrastructure projects. Consumerism boomed in days of high returns and low interest rates. At that time, the growth story was overrun into high optimism without paying a heed to the structural challenges.
The currency was kept artificially stable to further boost returns in dollar terms in the short to medium term. There was not much done for the economy to regain competitiveness as the sectors under protection such as cement, steel and automobiles thrived in the process whereas exporting sectors cut a sorry figure.
The twin deficit problem was written on the wall as this newspaper and other economic commentators repeatedly warned over looming deficits while the exuberance blindfolded the consumers and producers alike. As soon as growth jumped over 5 percent, the current account deficit started moving up as well.
And now the reserves are down to two months of import cover while political uncertainty is at its peak. The currency adjustment started taking place in December 2017 and ever since, optimism has faded. The mood started to change due to the political uncertainty as PM Nawaz was ousted a few months prior to it.
Today, almost everyone seems to have forgotten the growth story, talking about doomsday scenarios. Yes, the external account position is precarious, external debt is mounting and the fiscal deficit is getting out of the hand. The growth momentum may squeeze and the stability policies continue for 2-3 years with the IMF most likely at the helm, before the confidence is restored with fresh wave of optimism
Having said that, the GDP growth over 5 percent is a reality too - GDP is expected to grow at 5.8 percent in FY18 which may be tapered off a bit due to poor agriculture performance based on existing fixed table computation but the actual GDP growth might be understated.
The growth story in the last 2-3 years is probably understated. (Read “Understated GDP” published on 17th April 2018 and “The data mismatch” published on 9th May 2018). Today, the under-reporting of GDP is spelled from another angle. The velocity of money is abnormally falling in the past few years which cannot be true as velocity does not change abruptly. The velocity is defined as number of times one unit of money is spent to buy goods and services in a unit of time.
Mathematically, it can be computed by dividing nominal GDP to M3 (monetary aggregate). The ratio ranged between 1.99-2.15 (average:2.04) during FY09-14 and since then, it has started to taper off. The ratio was 1.78 in FY17 and is expected at 1.73 in FY18 based on projected M3 growth.
There is something somewhere wrong in computation of GDP as monetary aggregates are real numbers while GDP is based on estimates. Modern economic growth is probably not fully reflected in the old methodology and a few sectors have incentive to underreport due to heightened presumptive taxes since FY16.
Had the velocity been at 2.0 in FY18, nominal GDP would have been at Rs39.8 trillion; 16 percent higher than the reported Rs34.4 trillion. This would have lowered the debt to GDP and twin deficit in terms of GDP to lower the pessimism at home and improve ratings abroad.
The underreporting of GDP is also evident from low GDP deflator growth. The GDP deflator is the measure of price inflation in the country. The deflator growth averaged at 9.9 percent during FY11-14, while the CPI average was 10.2 percent in the same period.
Since then GDP deflator tanked; yes the inflation came down but at lower pace - GDP deflator growth averaged at 2.7 percent during FY5-18 whereas the CPI averaged at 3.9 percent. Mind you, inflation is lower lately due to low food prices which have much higher weightage in CPI then in GDP.
The bottom-line is whatever measure one may take; the GDP is understated by at least 10-15 percent. The GDP rebasing exercise is under process and new numbers are expected to release by Dec18. Once that is done, surely the ratios of debt and deficit to GDP would come down to lower the pessimism.
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