By Waqar Masood Khan
Published in Business Recorder on November 03, 2022
The following two paragraphs from the World Economic Outlook, October 2022, neatly sum up the challenges facing the global economy: “Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades.
The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering Covid-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the Covid-19 pandemic.
Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy.
Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.”
This is a fairly grim assessment of what is in store in the rest of the year. Loss of nearly half of the growth (to be continued next year also) and fiercely rising and doubling inflation (predicted to ease off next year) constitute the most dreadful scenario. Notice that there is no precipitous crisis of the type like the international financial crisis of 2008-09. If anything of this type does come to pass we can well imagine how destructive it would be.
In the short run, there is hardly a chance that these conditions would be improved. The decline in growth would have implications for poverty as many economies would be showing outright contraction. Higher interest rates and a strong dollar would have adverse effects on capital flows for the emerging markets and developing economies, with consequences for debt burden and repayment capacities. Furthermore, this would have implications for value of imports and thus add to inflationary pressures as well. Under the circumstances, Pakistan is facing unenviable challenges.
As expected after floods, the Federal Committee on Agriculture (FAC) has noted that the production of sugarcane decreased by 7.9 percent (81.6 million tonnes from 88.7 million tonnes); rice by 40.6 percent (5.5 million tons over last year’s production of 9.3 million tonnes); maize by 3.0 percent (9.2 million tons versus 9.5 million tons).
The cotton production declined by 24.6 percent (6.3 million bales from 8.3 million bales last year. The wheat production is likely to affected also as area under cultivation The wheat production target for upcoming Rabi 2022-23 is fixed to the tune of 28.370 million tonnes from an area of 9.3 million acres.
On the other hand, the LSM data has showed a decline of 0.4% percent during Jul-Aug. More concerning is the tractors production and sales which declined by 36.2 percent (7,991) and 30.3 percent (8,379), respectively, in July-September FY2023. During Kharif 2022 (Apr-Sep), urea and DAP off-take was 3,137 thousand tonnes (3.7 percent less than Kharif 2021) and 491 thousand tonnes (44.8 percent less than Kharif 2021).
However, the credit to private sector has taken a big hit. Against a credit flow of Rs.227 billion during 1 July to 21 October 22, the flow for the same period this year was negative Rs.86 billion or registered a decline of 138%. This is again consistent with austerity measures limiting imports and consequently domestic production. Inevitably, employment and poverty levels would be affected. Keeping slowing agriculture, manufacturing and credit it is clear that the economy is slowing down.
Another concerning development is the persistence of high inflation. The CPI inflation for October 2022 versus same month last year has increased to 26.6%, with urban inflation at 24.6% and rural at 29.5% showing. When in September inflation had come down to 23.2% from a high of 27.3% in August, it was hoped that it would moderate in coming months. However, this hope was short lived.
The slowdown was due to waiving of fuel price adjustment (FPA), which is yet to be recovered. But now another FPA has been imposed which is the basic reason of resurgence in inflation. A new rent survey has further fueled inflation.
What is more worrying is the trend in core inflation. Based on non-food, non-oil, it was 14.9% in urban and 18.2% in rural areas. The weighted average of core inflations with weights of 55% and 45% for urban and rural areas gives a core inflation of 18.25. This level of inflation would put pressure on the policy rate at 15%.
There are few more problems. The OMO (open market operation) injection has jumped in two weeks from Rs 5.2 trillion to Rs 5.8 trillion, an increase of Rs 600 billion. The inverted yield curve is persisting. Clearly, there is a major shift in short-term maturities, as few would be interested in buying low-yielding long-term bonds when T-Bills offer higher returns. The dollar has halted its descend and mostly trading in or around Rs 220/$ while open market difference is again quite high.
The budget numbers for first quarter would not be available for another month. However, an official report of finance division shows that the deficit for first two months was recorded at Rs 672 billion compared to Rs 462 billion.
The primary deficit was Rs 90 billion compared to Rs 37 billion. It may be pointed out that the Fund programme has envisaged steep fiscal adjustment targets which would be difficult to achieve if this pattern is not altered soon. There are significant expenditures on account of flood support which were incurred in subsequent months. Besides, many new proposals for subsidies have been approved, which would add to expenditure pressures. Tax revenues increased by 17% and would face an uphill task going forward as the required overall growth is 23%. The economic slowdown would make this task quite challenging.
Evidently, economic management has to balance competing demands on public resources and ensure that the choices so made are not in conflict with the demands of the lenders whose support is critical for continued stability.