KARACHI: The State Bank of Pakistan (SBP) has called for launching an industrial policy to kick-start the economy and reverse the strong downward trend reported since the last fiscal year.
The recently published annual report of the central bank paints a dismal picture of the economy as real gross domestic product (GDP) growth, private-sector credit and CPI inflation have been adversely impacted. The real GDP growth and private-sector credit growth have been the lowest since FY16 while inflation is at the highest level.
On the other hand, the reduction in growth may have helped improve the current account deficit as the demand for imports fell. However, the fiscal deficit and the gross public debt have increased.
The SBP clearly indicates that the economy experienced ‘marked adjustments’ as the exchange rate was realigned to market fundamentals, interest rates were increased, Public Sector Development Programme (PSDP) was curtailed and energy prices were increased. The purpose of the adjustments was to control the fiscal and current account deficits. Unfortunately, in an economy primarily driven by consumption, its compression is set to have an adverse impact on growth.
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Although the economic conditions are gloomy, the foreign reserves of the SBP are likely to increase as Pakistan receives loan tranches from the International Monetary Fund (IMF). Furthermore, the exchange rate between the US dollar and Pakistani rupee has stabilised around 156 since early September 2019 and fluctuations in the exchange rate are likely to be less common.
The Pakistan Bureau of Statistics (PBS) reports that exports in US dollar terms improved in September 2019 by 2.67% compared to the value reported in September 2018. Cumulative exports in the first three months of FY20 increased 2.75% compared to the same period in FY19.
Similarly, imports decreased in September 2019 by 13.90% compared to imports in September 2018. Imports fell 20.59% in the first three months of FY20 relative to the same period of previous fiscal year.
The trade deficit in the first three months of FY20 contracted 34.85% relative to the same period in FY19. The fall in the trade deficit has a crucial role in reduction in the current account deficit.
Considering the disaggregated data of the PBS, exports of major product groups have increased. Exports of the food group increased 13.98% in the first three months of FY20 relative to the same period of FY19, and those of the textile group edged up 2.95%.
Exports of leather manufactures, footwear, surgical goods and medical instruments are also showing an uptick in the current fiscal year. Results for September 2019 compared to September 2018 have been encouraging.
Exporters of products that have struggled in the recent past are reporting an improving trend. Exports of knitwear and readymade garments - the two largest products in terms of export value - increased 11.14% and 11.48% respectively in the first three months of FY20 relative to the value reported in the same time period of FY19.
In FY19, the growth of several textile products was only in terms of volume. Interestingly, exports of cotton yarn and cotton cloth have declined. In essence, exporters have likely benefitted from not only the fall in value of the rupee but also an improvement in its stability.
Indications are encouraging as export growth is being reported for value added textile products such as knitwear and readymade garments rather than low-value unfinished goods. A decline in imports in the first three months of FY20 was reported for all major product groups compared to the first three months of previous fiscal year, except for the machinery group. It increased slightly by 2.35%. This could indeed be an additional crucial factor in ‘marked adjustments’ of the economy.
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In a nutshell, the decline in imports has continued into FY20 as well as economic activity is suppressed. However, the revival of textile machinery imports can be important for boosting exports.
Ease of doing business
The recently published World Bank’s Doing Business 2020 ranks Pakistan as one of the major reformers in the world as it jumped 28 places. The reforms adopted by the country to improve business environment are likely to pay dividends as they encourage the entry of small and medium-sized enterprises. However, caution is advised.
According to Unctad’s Trade and Development Report 2019, the global and regional trends in real GDP growth in 2019 are expected to be the lowest since 2009. South Asia is expected to report its slowest year since 2012.
Furthermore, it is crucial to mention that commodity prices are expected to fall in 2019 after reporting positive trends in 2017 and 2018.
The size of fluctuation in prices of manufactured goods is typically lower compared to that of agricultural raw material, food and fuel commodities. Although it is crucial that Pakistan participates in global value chains, it should also introduce policies to enhance production in downstream industries in order to avoid the impact of shocks faced by low value-added commodities.
The writer is the Assistant Professor of Economics and Research Fellow at CBER, IBA
Published in The Express Tribune, November 4th, 2019.
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