Economy on the eve of elections

According to Gallup Pakistan, the economy, despite its all-pervasive effects, occupies the attention span of talk-show hosts only six per cent of the time. Regardless, the economy on the eve of elections is not in too bad a shape. Doomsday scenarios of caretakers rushing to the IMF in the face of depleting foreign exchange reserves and the dreaded one rupee one cent exchange rate have come to naught. It is time to get real. Even the ‘fiscal deficit is the mother of all evils’ clan is shifting gears. The economy’s growth remains at a fairly healthy level of 3.6 per cent. Higher than population growth, it implies a positive increase in income per capita. The two main drivers of real sector growth, major crops and large-scale manufacturing, have grown faster than the previous year — 3.2 per cent against 2.9 per cent and 2.8 against 1.2 per cent, respectively. The services sector, the driver of jobless growth during the Musharraf period, slowed down from 5.3 to 3.7 per cent.

Needless to say, the GDP growth has to be twice the rate achieved to make a difference to the unemployment rate, which, in the second quarter of the current year, has increased to 6.5 per cent from six per cent in the same quarter last year. It will be critical for the newly elected government to accelerate the rate of investment, which has declined in large-scale manufacturing by as much as 22.5 per cent in current market prices. Growth has mainly come from capacity utilisation. An indication of this is that while credit to the private sector has increased significantly, 86 per cent of it is for working capital. The change of the GDP base from 1999-2000 to 2005-06 reveals an anomalous shift in the structure of the economy. In the common development experience, structural change refers to an increasing share of manufacturing and declining share of agriculture. In our case, it is the reverse signaling deindustrialisation. Agriculture is the basis of our time-tested resilience. But the road to high growth and full employment can be taken neither through agriculture nor services. Manufacturing growth is the key.

As real growth maintained a semblance of respectability, especially in agriculture, inflation has also come down substantially. The consumer price index (CPI), the standard measure of inflation rate, stands at 7.8 per cent in the first 10 months of the current year, compared with 10.8 per cent in the corresponding period last year. In fact, the inflation rate of 5.8 per cent in the month of April is already approaching the lower range of the much sought after single-digit. While the Wholesale Price Index and the Sensitive Price Indicator (SPI) are also closely in line with the CPI, a rare happening, the SPI at 7.9 per cent is higher than last year’s tally of 6.7 per cent. In April, the SPI has begun to decline. The reason is that food inflation is coming down faster than the overall inflation. However, prices of wheat and wheat flour rose by more than 15 per cent. With wheat output short of the requirement by half a million tonnes, there may be further increases.

Core inflation has been above the headline inflation since the easing of the monetary policy. The holding action taken by the State Bank of Pakistan last April may have to be repeated to absorb the pressures arising from the excessive public as well as private spending during the elections campaign.

Published in The Express Tribune, May 10^th, 2013.