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Economy set to flourish

Economy set to flourish

Pakistan has successfully managed to handle COVID-19 so far but its impact on Pakistan’s economy is so far massive. In coming months; when the dust will settle only then the real impact could be determined. As a matter of fact; economy drives all the decisions even foreign policies are now being made on the basis of economic relations. We have seen this in recent events where relations between the countries are determining the economic growth of a country.

As per latest statistics; there are signs of economic recovery as all major indicators are positive so far. However, it is not clear how long this upward trend will continue and if this is just a temporary phase. Business are getting better, exports are increasing, tax collection in current fiscal year has improved as compared to last year, industrial production is gaining speed, stock exchange is recovering, foreign exchange reserves are on the rise, and remittances are stable at this moment.

As per government’s figures, petrol usage has increased by 8 percent, diesel by 15 percent and fertilizers by 22 percent, which show that economic activities are on the rise. Tax collection in the month of July is higher by 23 percent against the month’s target, which is also 15 percent higher from the last year’s collection. FBR has collected additional revenue of around PKR 57 billion in just one month. Government is trying to automate the FBR system thus it will improve the refund mechanism as well. Exports have increased by 5.8 percent as compared to last year wherein Pakistan has exported goods worth USD 2 billion in July 2020 as compared to USD 1.88 billion of exports in July 2019. FX reserves are currently at USD 19.5 billion which is highest level after Jan 2018. Further; government has announced a construction package, which is a positive development and will help various other sectors as well. Domestically, there is an increase in the cement production and sales have increasedby 33 percent with sale of 4 million tons of cement in July 2020. Government’s construction package has also increased the value of real estate and properties by almost 15 percent.

Bloomberg has ranked Pakistan Stock Exchange as world’s second best market in terms of recovery. Index has increased by 48 percent since March 2020. On 7 August; almost 820 million shares were traded which was highest in last four years. Moody’s has put Pakistan’s credit rating as Stable which means it has the ability to pay off its debt. Government claims that they have given a tax free budget and has reduced import duties on thousands of items and subsidies have also been given to various categories.

Therefore, we can say that first month of fiscal year 2020-21 has shown positive trend where economic activities are going on, both internally and with respect to exports. While on the other; there is also concerns, if this momentum will be maintained and there will be a consistency or it is just a temporary phase.

This all doesn’t mean; all is good. Due to corona’s impact on the economy, SBP reduced the interest rates from 13.25 to 7 percent in two/three months’ period. Higher interest rates were maintained to facilitate foreign investors providing hot money. Entire hot money evaporated as soon as SBP started reducing the interest rates. The only reason SBP was giving for higher interest rate at that time was high rate of inflation in the country. Inflation is still on the higher side; as per government, inflation is 9.3 percent whereas some estimate it as even more than 11 percent. Food inflation of 18 percent is defiantly on the higher side. In coming weeks, it is expected that inflation especially food inflation will further go up. The most affected segment of the society is low income group as they have more households as compared to other classes of income groups thus their major spending is on food items as compared to any other item. There is a fear in the market that government might increase the interest rates again to control the inflation.

For some unknown reasons; Pakistan had to return USD 1 billion to Saudi Arabia and it is being said that Pakistan will have to return another USD 1 billion in coming weeks. Saudi government deposited USD 3 billion in SBP in 2018 for supporting the then falling foreign exchange reserves of Pakistan. Saudi Arabia also gave a deferred oil facility to Pakistan, which is estimated to be around annual payment of USD 800 million. It is being said that Saudi Arabia has asked for this payment as well for the first time, which was always waived off by Saudi Arabia in the past. These developments are unexpected and nothing is clear as of now. The relations between Pakistan and Saudi Arabia were never at this level. Almost 3 million Pakistanis are currently working in Saudi Arabia where they remit billions of dollars every year to Pakistan. If anything goes down with Saudi Arabia that means UAE will also follow the same where 2 million Pakistanis are currently employed.



On the energy side; circular debt is still not under control. It has crossed PKR 2 trillion so far and is not manageable. Real cause of circular debt is inefficiency of distribution companies and poor transmission network. A lot of emphases is on negotiating deals with the IPPs but the huge capacity payments are being made to the public sector IPPs i.e. RLNG based power plants. If government wants to get some concessions then it should start from its own power plants. Prices of electricity are increased due to fuel price adjustments, which means transferring cost of imported fuel to the consumers. In coming months, government has plans to further increase the prices of electricity. Coal and oil prices have dropped internationally thus cost of imported fuel has also dropped then why the prices of electricity are being increased in Pakistan. There are various leakages in energy chain, which is causing circular debt, therefore, increasing the prices of electricity is not the solution of circular debt. It is important to fix transmission and distribution network.

The most alarming issue at this moment, which is not getting media attention at this moment is continuous deprecation of Pak rupee. In just few week’s times, dollar is moved to 168 from 155 and it can touch 180 by December this year. This level of foreign exchange rates will have various negative impacts on the economy. Apparently, government has no plans to control this trend of depreciation. In coming months, it is being assessed that current account deficit will increase again which will have a direct impact on the reserves and thereafter on the exchange rates as well therefore, there is a possibility that in coming month’s rupee will get a hit. The depreciation of rupee has a multiplier effect and consequently it will bring a new wave of inflation in the country. Government claims that remittances have increased in July this year as compared to last year but we must not forget that a lot of labor have been laid off in the Middle East and they are returning to Pakistan. While relocating to their home country; they are bringing back all of their savings, which can be one of the reasons of higher remittances in July plus we usually see such surge during Eid days.

Job creation is one of the biggest challenges current government is facing. Due to coronavirus, a lot many people have lost their jobs. A lot many businesses are near closure or are under heavy debt that too from undocumented loan providers. Not all get loans from the banks, while a large number of the borrowers usually borrow from the individuals on a fixed interest rate as such lenders don’t demand detailed documents unlike which banks usually ask. Those individuals lend on very strict conditions and sometimes, it even takes very ugly shape. Such undocumented lending and borrowing should be controlled and must be discouraged.

As government is focusing on construction industry. This is also a myth that if construction industry is flourishing, economy will also flourish. Every sector thinks it is the key driver of the economy and tries to get concessions and benefits from the government. Ultimately only 10 to 15 percent of a sector participants actually avail the benefits and resultantly deliver as well, rest are just good for nothing. It is important to note that construction industry can only flourish if people have funds to invest in a house. Today, we see a lot of vacant apartments, offices, places. Therefore, best solution in present day situation would be; if government itself invests in housing projects as most of the middle or low income group are struggling to survive let alone going for the construction of a house. Keeping in view that it would be difficult for a middle or low income group to pay a fixed instalment of say 50,000 or 100,000 per month for a house or apartment to any real estate company or a construction company when their own fixed monthly income has been slashed by 33 percent at least or they are jobless. Therefore, if government starts its own low cost housing projects then it can help not only the construction industry but also other 30 odd sectors.

Government has successfully controlled the coronavirus which must be appreciated. But the real test of the government has just started. Government needs to improve the governance and should control food inflation. Moreover, it is important to give soft loans to SMEs, SMEs are the future of Pakistan. Supporting SMEs is the only way forward for Pakistan. Government is focusing on increasing exports and in this respect it is giving incentives to exporters as well. In addition, local manufacturing should be promoted and unnecessary imports must be discouraged and stopped.

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