March economic outlook

02 April 2024

Published in: Business Recorder

 In the most damning indictment of the caretaker government’s performance on the economic front, the Gross Domestic Product (GDP) posted a one percent growth in the second quarter (October to December) against 2.50 percent in the first quarter (July to September).

The reason: large-scale manufacturing sector (LSM) as per the February Monthly Economic Update and Outlook slowed further from negative 0.40 percent (July-December) to negative 0.52 percent (July-January) and while the February Outlook did forecast a decline yet bafflingly it was based on the observation that in January total cement dispatches (with a weightage of 4.65) showed a year-on-year decline of negative 10.98 percent while ignoring cotton yarn, with a weightage of 8.88, rising by 0.50 percent, cotton cloth with a weightage of 7.29 by 0.6 percent and garments with a weightage of 6.08 rising by a whopping 28.06.

A comparison made with the months that Ishaq Dar was the finance minister who violated the agreement with the International Monetary Fund (IMF) by controlling the rupee-dollar parity and extending a 110 billion rupee electricity subsidy to exporters at a time when devastating floods had rendered millions homeless. This is why the LSM for the first and second quarter 2024 shows an improvement by registering a 1.84 percent growth in January this year against negative 5.59 percent in January last year.

On 28 March 2024, Pakistan Bureau of Statistics (PBS) uploaded a press release on its website titled ‘National Accounts Committee Meeting’ noted that “industry in Q2 (October to December), like Q1 (July to September), has shown a negative growth (-0.84%) as compared to Q2 last year, mining & quarrying industry has witnessed a negative growth of 4.17% because of decrease in production of gas (-5.04%), marble (-40.13%), limestone (-20%), etc., and decline in exploration cost.

Large-scale manufacturing, which is based on Quantum Index of Manufacturing (QIM), has witnessed a positive growth of 0.35% due to increase in cooking oil, garments, fertilizers, etc.

Electricity, gas and water supply industry has shown a positive growth of 1.54% because of increase in output of IPPs (Independent Power Producers), hydro and nuclear plants. Construction industry declined to -17.59% due to a decrease in production of cement (-8.7%) and iron & steel (-2.5%) as well as decline in general government expenditure.”

Three observations are in order: first, cooking oil is largely imported while fertilizer is the recipient of domestic gas at subsidised rates. Second; the claim of positive growth in electricity and gas is in spite of a reduction in demand due to ever-rising prices that are part of the lending conditions, and finally the claim that general government expenditure declined is specific to the decline in development expenditure while current expenditure has been on the rise funded by the massive rise in borrowing from the domestic market that, in turn, has crowded out private sector credit (estimated to have declined by 54.1 percent July-March 2024 compared to the same period the year before) in the March Outlook.

Consumer Price Index (CPI) July to February 2024 was 28 percent against 26.2 percent in the comparable period the year before. And while the Outlook claims that in February this year the CPI was at 23.1 percent, much lower than 31.5 percent in February last year, yet two factors may be responsible for this lower growth.

The first is the Dar factor prevalent last year while the second is the concern voiced by many independent economists that CPI calculation has been understated by at least 2.5 percentage points.

Elaborating on this, Dr Hafiz Pasha pointed out that: (i) gas prices were shown to have risen by 1100 percent on 15 February while a week later the hike in prices was estimated at 480 percent only; (ii) the lowest quintile of electricity and gas prices was taken rather than the average; and (iii) construction costs and rent must be at par while PBS estimated an 18 to 20 percent rise in cement and only 5 to 6 percent in rents.

Federal Board of Revenue (FBR) posted a major increase in revenue – 29.8 percent – however, this can largely be explained by inflation and the levy of sales tax on items that were previously not taxed.

The increase in non-tax revenue by 104.7 percent – a gain due to the doubling of the rate of levy on petroleum, which is another indirect tax whose incidence on the poor is greater than on the rich.

The levy collected last fiscal year was 542 billion rupees while 869 billion rupees is budgeted for the current year and is on track to be collected that would result in a rise of 60 percent. It is little wonder that poverty levels are as high as 40 percent, estimated by the World Bank last year, and which are set to rise further by the end of this year.

Remittances continued to decline – by negative 1.2 percentage points July February this year compared to the comparable period year before – a decline that indicates that the reversal of Dar’s policy of controlling the rupee-dollar parity effective 26 June 2023 has not succeeded in attracting remitters back to using the official channels rather than the illegal hundi/hawala system or, in other words, more incentives need to be given to those who remit money to this country.

The state of the economy on the eve of the departure of the caretakers showed a significant worsening of all major indicators, mainly attributable to the massive increase in reliance on domestic borrowing to fund current budgeted expenditure, a condition that makes the challenge facing the elected government that much harder.

The way out requires out of the box economic thinking, inclusive of major structural reforms as well as voluntary sacrifices by the major recipients of budget expenditure for a year or two, and proactively seeking foreign investment that would require diplomacy by the civilian and military establishment. Focusing on the one without the other is not likely to turn the economy around anytime soon.