The government has recently been making frequent positive statements about on-going developments in the economy. Rightfully, success in the process of stabilization has been highlighted. The current account in the balance of payments was transformed into a surplus in October. Over the four-month period, July to October, the current account deficit has declined by as much as 74 percent. However, this has happened at a time when external capital inflows in the financial account have fallen by 37 percent. As such, while the current account deficit has been reduced by over $4 billion the foreign exchange reserves in the first four months of 2019-20 have increased by only $1 billion.
There is need to understand how the quantum reduction in the current account deficit has been achieved. Since the new Government took power it has made four big moves to curtail the level of aggregate demand leading thereby to a cutback in imports. The measures include a 26 percent depreciation of the rupee, near doubling of the policy rate, big cutback in development spending in real terms of 37 percent in 2018-19 and a Budget for 2019-20 with heavy additional taxation of almost Rs 700 billion. In fact, the speed, range and intensity of steps for stabilization can be characterized as 'overkill'.
The consequence is that the 'real' economy is floundering. The PBS preliminary estimates indicate that the GDP growth rate has fallen from 5.5 percent in 2018-19 to 3.3 percent in 2019-20. More recent estimates are that it may have actually been somewhat below 2 percent in the latter year.
There is need to focus on current trends in the real economy to determine the cost that the people of Pakistan are paying in terms of foregone income and employment growth in the economy during the process of stabilization, as part of the prime objective of the on-going IMF program. As such, some indicators of growth in different sectors of the national economy are presented below.
The data on the Quantum Index of Manufacturing (QIM) for September 2019 has just been released by the PBS. The growth rate in September was negative 5.6 percent and cumulatively over July to September it is negative 5.9 percent. The fall in production appears to be pervasive with nine industrial groups showing negative growth, textiles demonstrating near zero growth and only five groups achieving positive growth.
Overall, over 90 percent of the large-scale manufacturing sector is showing either near zero or negative growth. Some industries have seen big double-digit decreases in production. This includes a fall of 34 percent in the automobile industry, 14 percent in petroleum products, 17 percent in iron and steel products and 12 percent in pharmaceuticals.
The agricultural sector has also been affected by the big increase in fertilizer prices and cost of other inputs. There are clear indications that there has been big shortfall in the cotton crop. It is likely to be over 10 percent below last year's output, which was already very low. The rise in prices of vegetables also reflects a decline in supplies. The outcome of the wheat and sugarcane crops will determine the growth rate of major crops combined.
The declining output in the commodity producing sectors is also impacting on big service sectors like wholesale and retail trade and transport and communications. The turnover in the former sector depends on the quantum of marketing of manufactured, agricultural and imported goods. As described above, the production in the large-scale manufacturing sector is falling and so is probably the output from agriculture. On top of this, the process of reduction in the trade deficit has led to a big fall in the volume of imports of over 12 percent in the first four months of 2019-20. Consequently, the wholesale and retail trade sector is likely to be in a depressed state.
Similarly, value-added in the transport sector has also been adversely affected. This is demonstrated by the 11 percent decline in consumption of petroleum products, especially in HSD oil and motor spirit. The construction sector also appears to be experiencing a decline. Federal development expenditure has increased but this does not appear to be the case at the Provincial level. Despite lower than budgeted transfers, the four Provincial Governments have built-up a large combined cash surplus of Rs 168 billion by the 1st November 2019. This can only be attributed to slow development spending. Consequently, the consumption of iron and steel products is down by as much as 25 percent.
Overall, the current trends are that of a recession in many of the key sectors of the national economy. Now that the current account deficit has been brought under control, the emphasis has to shift towards the revival of the growth process in the economy.
The priority should be, first, on trying to achieve a measure of export-led growth for long-run sustainability. Fiscal incentives to exports will need to be at least partially restored and liquidity improved by larger flow of refunds. Second, the policy rate needs to be brought down to at least 11 percent by early next year. Third, development spending within the budgetary limits must be expedited both by the Federal and Provincial Governments. Fourth, the focus on poverty alleviation must be achieved by effective targeting and delivery of the BISP and Ehsaas programmes.
The SBP expects the GDP to grow by 3.5 percent in 2019-20. The International agencies have indicated that their expectation is of a growth rate close to 2.5 percent. However, if the present negative trends continue then even a growth rate of 2 percent may not be achieved. Clearly, there are no grounds for complacency at this stage.
(The writer is Professor Emeritus in BNU and former Federal Minister)
Copyright Business Recorder, 2019