As soon as the news broke out that National Accounts Committee had approved the provisional growth estimate of 3.94 percent for FY 2020-21, hell broke loose. While PTI stalwarts rightfully wanted to boast their government’s performance, the opposition loyalist found it hard to recant their 2-year tirade of ‘economy is not working and hence attacked the credibility of the numbers. Amidst all this noise and battle of narratives, however, objectivity was lost.
Let’s get some facts straight.
- The recently released growth numbers do not seem fabricated or fudged.
- Pakistan’s economy is indeed recovering faster than expected.
- The present government can take at least partial credit for this recovery.
- And yes, the next 2-3 years indeed look promising.
- But this growth doesn’t mean that inflation is going to go away. In fact, at least during the following year, the inflationary pressure will keep mounting.
- More importantly, this growth cycle won’t be any different from the previous ones, and we are likely to go to IMF yet again in another three years.
So how do we know that these numbers are not fabricated? Let’s first unpack the provisional GDP growth estimate of 3.94 percent.
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Within the broad categories of industry, agriculture, and services sector, two main sub-sectors are responsible for the bulk of this growth. These include large-scale manufacturing (LSM) and wholesale & retail trade, which contribute nearly 10 percent and 19 percent to our GDP, respectively, and grew by 9.29 percent and 8.37 percent.
It means that out of 3.94 percent, 2.51 percent came only from these two sectors. The rest of the 1.43 percent came from agriculture and the rest of industrial and services sub-sectors. Given the bumper crops of wheat, rice, maize, and sugarcane and growth in construction, finance & insurance, and housing services, this residual number is hardly disputable.
Growth contributors
Let’s then look deeper into the two major contributors of growth this year. LSM shrunk by 10 percent last year and 2.6 percent the year before, which means that we have yet to reach the base of FY20 (and FY19) in real terms, even with exceptional growth this year.
The growth in LSM is also validated by monthly industrial output data released by the Pakistan Bureau of Statistics. For instance, LSM posted double-digit growth in both November and December. It slowed down later but posted an increase of 22 percent in March again, owing to lockdown in the last few months of the previous fiscal year.
The growth in LSM is also manifested by months-long delivery times on booking of new SUVs and cars. Similarly, this year has been exceptionally good for the textile, cement, and pharmaceutical sectors, owing to various reasons. All these factors attest to the fact that the LSM sector has indeed shown impressive growth this year.
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The wholesale and retail trade also shrank by nearly 4 percent last year and posted modest growth of 1 percent the year before. This means that we have grown merely by 4 percent over the FY20 base, despite the increased consumption on the back of enhanced remittance inflows and the COVID stimulus package.
The remittances have increased by 29 percent this year. Over a base of $23billion last year, this means that we are expected to get an additional $6.6 billion or Rs.1+ trillion, which is being pumped into the economy. Then, the government’s stimulus package passed on hundreds of billions of rupees to poor households.
Altogether, this increased consumption significantly, which in turn helped the sector grow. The exceptional crops also contributed considerably to the wholesale trade sector. Therefore, even the growth in wholesale and retail trade cannot be that off the mark.
Then comes the political economy of these numbers. If anything, healthy growth in FY21 reflects the performance of the previous Finance Minister, Mr. Hafeez Shaikh. It makes the current Finance Minister Shaukat Tarin’s job to show sustained growth next year much harder. Anyone who understands economics knows fully well that Shaukat Tarin could have hugely benefitted from the low-base effect next year if the economy had grown as per the original forecasts of 1.5 to 2 percent.
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Some people have also quoted out-of-whack projections by IMF and World Bank as evidence for our numbers being incorrect. They probably don’t realize that these international financial institutions (IFIs) do not collect primary data from the ground and instead rely on government data amongst other sources.
Let’s look at the IMF’s initial projection of double-digit growth by India this year, which had to be revised downwards later, considering the impact of the pandemic. India’s economy is now expected to contract by 7.5 percent this year. Yes, the IFIs can be wrong sometimes.
So how did we manage to pull this growth?
Our excessively resilient economy and a fast-growing population indeed played a major role in this rapid recovery. As discussed above, the low-base effect, owing to the contraction of our GDP last year, also had some contribution. But we should not ignore the government’s efforts in this regard.
Pakistan’s well-coordinated strategy to deal with COVID-19, driven right from the top (NCOC), was widely appreciated. The only blanket lockdown happened last fiscal year. Since then, we have continued to operate on a restricted scale amidst controlled restrictions, and with the third wave receding, it is clear that we have done it right.
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Government’s COVID-stimulus package of Rs. 1.27 trillion also played a big part in providing targeted financial support to the poor and offering much-needed relief to businesses. SBP’s timely interventions like Long-term Financing Facility (LTFF) and Temporary Economic Refinance Facility (TERF) also helped ease the crunch for the industries.
The construction package was instrumental in driving growth in the construction sector (8.3 percent), housing services (4 percent), and the cement sector (25 percent). Similarly, the increase in remittance inflow through the formal channels can be partially attributed to the government’s clampdown on hawala and hundi providers (money or value transfer services) as part of the FATF action plan.
Last but not least, a drastic reduction in interest rate, albeit with a delay, also significantly contributed to the economic recovery. With business confidence reviving, as evident by the recent spike in the stock market, this recovery is likely to continue, and the next 2-3 years look promising.
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But this growth episode doesn’t mean that inflation is going to go away. In fact, inflationary pressure would mount as further growth kicks in. So far, the inflation has been mostly supply-pushed, either through an increase in fuel or electricity prices or distortions in the commodity markets and supply chains.
But now, with increased growth, the demand will also pick up, pushing inflation higher. So far, the government’s decisions to not pass on any further electricity tariff increase and to withhold fuel price increase have helped.
But there is a need also to address the problems associated with agriculture supply chains through doing away with cartelization, minimizing profiteering by middlemen, discouraging hoarding, and transforming the archaic and inefficient subsidy regimes and agriculture markets. At some point, we would also need to look for a monetary policy shift.
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We also need to be cautious, as this growth cycle is not likely to be any different from the previous ones. Further growth without investment will not only increase inflation but will also increase imports. Our trade deficit has already touched $24 billion. For now, the current account is being compensated by increased remittances, but the increasing trade deficit has the potential to go out of control in 2-3 years, fueling yet another current account crisis and necessitating another IMF program.
If we want to break out of this vicious cycle, the only answer is structural reforms, which in turn would involve taking some tough political decisions. But for now, let’s celebrate this episode of growth.
The writer is a public policy expert and an honorary Fellow of Consortium for Development Policy Research. He tweets at @hasaankhawar. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.