Conversation with Dr Ayub Mehar — a renowned economist
PAKISTAN & GULF ECONOMIST had an exclusive conversation with Dr Ayub Mehar regarding the current state of the economy of Pakistan. Following are the excerpts of the conversation:
According to the leading international economic institutions and think tanks (IMF, World Bank and Economic Intelligent Unit) it is a good surprise that Pakistan, China and Saudi Arabia are the only countries where positive growth in GDP is expected in the current fiscal year (It is 3 percent for China, 0.5 percent for Pakistan and 0.3 percent for Saudi Arabia). The other countries have to face negative growth rates. The growth in the production of large scale manufacturing, exports and surge in foreign exchange reserves seem positive indicators in Pakistan. The stocks of foreign exchange reserves are recorded at 19.9 billion dollars on 6th November 2020 (12.7 billion dollars with the State Bank of Pakistan, and 7.2 billion dollars with commercial banks). The most important improvement which has been publicized by the government is the growth in Large Scale Manufacturing (LSM) during the first quarter of current fiscal year, which was recorded at 4.8 percent. It was -5.5 percent during the same period last year. According to the State Bank of Pakistan, the first half of 2019-20 has shown negative growth of large scale manufacturing at -2.8 percent even once it was reached at -5 percent, while the rate of inflation was in double digit at the end of December 2019. Obviously these statistics reflect the economic situation before corona pandemic in Pakistan. So, it is incorrect that corona pandemic is responsible for negative growth for Pakistan for the fiscal year 2019-20.
The impact of COVID-19 was observed in Pakistan since April 2020 (in the fourth quarter of the year under discussion). So far as present growth in LSM is concerned, it is because of the growth in food, pharmaceutical, non-metal minerals, rubber and chemical sectors, while a minor growth was also observed in textile manufacturing. The automobile sector is still showing a negative growth though magnitude of negative growth is declining. A very high negative growth was observed in engineering, leather, electronics and wood products. The business entities in corporate sector have also shown attractive growth in their profits. But the major earners belong to telecommunication and IT sectors. The surge in the demand of IT and telecommunication services during corona pandemic is quite obvious. However, increase in the production of large scale manufacturing, corporate profits and tax collection by the federal board of revenue in recent past do not match with the GDP growth. The increase in General Sales Tax (GST) and corporate profits absorb the inflationary impact. The profits and sales tax increase by increase in the prices of goods and services. Such increase does not comparable unless their values are not calculated on constant prices. The higher collection of GST indicates the higher consumption of goods and services, while higher consumption expenditures in the presence of lower growth in GDP indicate lower growth in savings which is a bad indicator for the future of economy.
In considering the present state of economy in Pakistan, the most important indicator is inflation. The CPI (Consumer Price Index) based inflation was 4.7 percent in 2018, 6.8 percent in 2019 and 10.7 percent in 2020. Importantly, the inflation rate was recorded at 5.6 percent in January 2019, when it was started to increase. In August 2019, it had crossed the single digit limit and was recorded at 10.5 percent. It was 14.6 percent in January 2020, 12. 4 percent in February 2020, and 10.2 percent in March 2020. The rates of CPI-based inflation were 5.1 percent in 2018, 7.1 percent in 2019 and 10.2 percent in 2020 in urban areas of Pakistan. However in rural areas it was 4.1 percent in 2018, 6.3 percent in 2019 and 11.6 percent in 2020. The SPI (Sensitive Price Index) based inflation was 3.8 percent in 2018, 7.8 percent in 2019 and 14.4 percent in 2020. This is the most dangerous trend, which requires serious attention of the policy makers. Historically, in Pakistan inflation in urban areas was always higher than rural areas but since 2019 inflation in rural areas is higher than urban areas. The other dangerous aspect of the inflationary trend is that the SPI based inflation has become much higher than CPI based inflation since 2019. It indicates that prices of essential commodities are increasing more rapidly than the other goods. Here, it is notable that urban CPI covers 35 cities and 356 consumer items, while the rural CPI covers 27 rural centers and 244 consumer items.
In the present context, a budget deficit of over 9 percent of GDP is expected and to finance the deficit the government has to borrow from public or external sources. According to the State Bank of Pakistan, total debt and liabilities are 98 percent of GDP, while according to the definition described by the ‘Fiscal Responsibility and Debt Limitation Act’ it is 72 percent of GDP. It is notable that the definition of debt in the ‘Fiscal Responsibility and Debt Limitation Act’ was revised in June 2017 and according to the new definition: “Total Debt of the Government” means the debt of the government (including the Federal Government and the Provincial Governments) serviced out of the consolidated fund and debts owed to the International Monetary Fund (IMF) less accumulated deposits of the Federal and Provincial Governments with the banking system”. Despite a dangerous level of debt-to-GDP ratio, the government has launched another sovereign debt instrument (Naya Pakistan Certificates) which will further increase the liabilities The conventional and Shariah compliant versions are available of NPCs, while return on dollar dominated is from 5.5% (3 month maturity) to 7 percent (6 year maturity) and 9.5 percent (3 month maturity) to 11 percent (6 years maturity) on Pakistani rupee dominated. In the presence of historically lowest policy interest rate in Pakistan, these returns are very attractive. After declining by 6.25 percent since March 2020, now the policy interest rate is 7 percent, though it is much higher than other countries in the world.
According to the official sources, the total debt and liabilities of the Government of Pakistan were 163.1 billion dollars on 30th June 2019, which have arrived at 168.2 billion dollars on 30th June 2020. It shows addition in public borrowing. However, on 30th September the total debt and liabilities have arrived at 165.8 billion dollars because of the repayment of some debts. But, the more important point is not the magnitude of debt, it is the composition of debt. At present, 34 percent of total debt is external while more than 98% of external debt is long-term debt.
Though official statistics show a minor increase in exports and decline in imports in October 2020 (while there is a difference in the statistics released by the Ministry of Commerce and Federal Bureau of Statistics due to their statistical methodology). But it is an incomplete picture of the external trade. If we look in broader context, the imports of goods and services were recorded 67.9 billion dollars in fiscal year 2018, 62.8 billion dollars in 2019 and 50.7 billion dollars in 2020. It is a steep decline in the imports based on aggregate data of imports of goods and services. The imports of goods and services were 13.4 billion dollars, in the first quarter of 2019-20 (July to September), which are arrived at 12.4 billion dollars in the same period of current fiscal year. There are several factors of this steep decline in imports. The unusual high depreciation in Pakistani rupee, corona pandemic, and declining in the imports of machinery and spare parts are included in these factors. In this context, the decline in imports is not a good indicator. It reflects drop in business activities and investment in fixed assets, which ultimately affected the employment and GDP of the country. Exports of goods and services were 30.6 billion dollars in fiscal year 2018, 30.2 billion dollars in 2019 and 27.9 billion dollars in 2020. This trend is showing a declining tendency in exports of goods and services in Pakistan. Similarly, in the first quarter of 2019-20 (July to September), exports were recorded at 7.3 billion dollars, now in the same period of 2020-21 these arrived at 6.6 billion dollars, which is a clear indicator of continuity in declining of exports from Pakistan. So far as government’s claim about increasing exports of textile sector is concerned, fact is that during the first 4 months of current fiscal year (July to October) 4 percent growth in the exports of textile and clothing sector was observed. But, the mainstream textile industry (Spinning and Weaving) shows declining trend. The exports of yarn was declined by 40 percent and 8 percent declined was recorded in the exports of cloth from Pakistan. What its mean: a positive growth in the exports of made ups. Due to declining exports of yarn and fabrics, these intermediate products were available in local markets (B2B) to the made ups manufacturers. The businesses of finished products in clothing sector are still closed in the countries who import yarn and cloth from Pakistan. So, a declining in the exports of yarn and cloth and increase in garments, bed sheets, towels, and other finished products is quite obvious.
First of all, it is important to understand that the Financial Action Task Force (FATF) is not a financial institution or lending agency. It is a money laundering and terrorist financing watchdog. Its main function is to reform through policy advocacy and lobbying for national legislation and regulatory works to reduce the money laundering and terrorist financing. Currently, 37 countries and 2 regional organizations are its member, which represent almost entire financial resources of the world. The members have voting rights in decision making. Pakistan is not included in its members, so it does not have a voting power. Other than G8 countries, China, India, Saudi Arabia and Turkey are also its members. However, more than 200 countries and jurisdictions are committed to implement its recommendations. The FATF reviews money laundering and terrorist financing techniques and continuously strengthens its standards to address new risks, such as the regulation of virtual assets, which have spread as cryptocurrencies gain popularity. Based on its review, it classifies the countries in white, grey and black categories. The leading international financial institutions (IFIs) including Asian Development Bank, International Monetary Fund (IMF) and World Bank are its observing members. The observing members follows FATF’s recommendations in their lending and support policies. This is the reason that why FATF is important for Pakistan. If FATF declares Pakistan as ‘Black’, the IMF, World Bank and Asian Development Bank will follow its recommendations and no financial support or borrowing facility will be available to Pakistan. The grey category is a temporary condition where a country is provided opportunities for reforms to control over money laundering and terrorist funding. Currently, Pakistan is in the grey list of FATF and has actively implemented the recommended operational and legislative reforms in its banking and financial system. In its last meeting, the member countries of FATF have recognized Pakistan’s efforts and granted further time period to comply its recommendations. But it is a fact that India is playing a negative role against Pakistan to show that Pakistan supports terrorist activities. But, now after political changes in USA it is expected that FATF will vote in favor of Pakistan. Moreover, in past Asian Development Bank, World Bank or IMF have never stopped the lending to Pakistan on the basis of FATF recommendations.