The recently released Economic Survey paints a bleak picture of Pakistani economy. Since the period covered by the data includes mostly the first nine months of the fiscal year, meaning July 2019 to March 2020, much of what is portrayed cannot be attributed to the disruptions from COVID-19.
Private credit off-take
Credit to the private sector fell sharply from Rs554.7 billion last year to Rs187.3 billion this year in the July to March period. This is a marked decline and shows a sharp deceleration underway in private sector activity due to “crowding out effect” as government emerged as a major borrower. The breakdown paints an even bleak picture. Working capital loans, for example, dropped from Rs369 billion last year to Rs28.8 billion this year in the same period. Loans for fixed investment dropped from Rs83.1 billion last year to negative Rs5.2 billion this year, meaning on net there was negative investment in the country this fiscal year. At the same time, the amount of foregone revenue from tax exemptions jumped to Rs1.15 trillion this year. Only a few years ago, the figure was less than half this amount. The sharp increase in exemptions given to businesses over the two years that this government has been in power has no doubt contributed to this picture.
Despite a string of ‘incentives’ and ‘packages’ targeted at specific industries, there has been a sharp deceleration in the pace of economic activity in the country. The cost of these special incentive packages is evident at least partially in foregone revenue, but the benefits don’t show up in demand for working capital or investment. The assumption under which the government has repeatedly handed out incentives to the industrialists is that ultimately this will benefit the poor through increased employment and business activity. But it seems these wealthy investors prefer to retain much of the benefit from the packages for themselves, and very little is actually passed on to the poor. Instead of the rich, it should put the poor at the center of its economic policy agenda. Putting money in the hands of the poor and unemployed means it will return to the economy in the form of demand, and that demand should be the signal for wealthy investors for where to invest. This approach has the added benefit of giving us more durable and organic growth rooted in the needs of the people directly. Investing in the rich is providing meagre dividends.
Large scale manufacturing
Exchange rate depreciation and contractionary monetary and fiscal policies plunged the large-scale manufacturing (LSM) by 5.4% in the outgoing fiscal year as per the figures released by the Pakistan Economic Survey 2019-20. The survey said that except for fertilizers, almost all other sectors witnessed decline in the July-March period. Negative growth in the textile and food, beverages and tobacco, iron and steel products, coke and petroleum products dampened the overall manufacturing in the country. The economic survey said that LSM was not able to withstand constrained economic environment and the distress continued during the current fiscal year.
This big industry provides employment opportunities to about 16.1% of the total labor force while its share in the GDP is around 13-14%. While the fiscal year 2019-20 started with a positive note as the LSM posted 2.11% growth in July 2019, the growth dampened to negative 2.42% in August, whereas the pace picked up and growth was recorded at 2.76% in September 2019, followed by another sharp increase of 5.4% in October 2019. Whereas November 2019 again witnessed a negative growth of 3.81%, but there was a steep increase in LSM growth of 15.27% in December 2019. The increase was due to sugar production, which rose sharply owing to favorable weather conditions and timely start of crushing season as compared to last year, reaching 7.09% in January. While February witnessed a moderate growth of 0.16%, the LSM nosedived by 21.9% in March due to closure of business activities in the wake of COVID-19 outbreak.
The major sectors contributing in the LSM are textile with weight of 20.92%, food, beverages and tobacco at 12.37%, coke and petroleum products at 5.5%, iron and steel products 5.4% non-metallic mineral products 5.36%, automobiles 4.61%, pharmaceuticals 3.6% and chemicals 1.7%. The economic survey said the textile production declined by 2.57% during Jul-Mar against -0.17% in the same period last year. The food, beverages and tobacco sector decreased by 2.33% during the current fiscal year, coke and petroleum industry registered a double-digit contraction of 17.46%.
The pace of contraction of iron and steel production, during nine months of current fiscal year, was negative 7.96% and the decline was mainly in wake of subdued construction activities due to high financing cost. However, the non-metallic mineral products performed well to close at 1.82%, but the automobile sector witnessed a steep decline of 36.5%, pharmaceuticals registered decline by 5.38% and the chemicals declined by 2.3% during Jul-Mar. Out of 15 sectors in the LSM basket, only five were in the positive during 2019-20.