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http://www.thefridaytimes.com/beta2/tft/article.php?issue=20120106&page=9
The last fiscal year, which ended on 30 June 2011, was a bad one for Pakistan's economy, not least because of the devastation wreaked by the August 2010 floods. Half way through the current fiscal year, things once again look glum. Growth forecasts are being revised down (from an ambitious 4.2% to a still ambitious 3.6%). Let's look at five of the key factors that will influence the economy in the current fiscal year.
Another Set of Floods in Sindh
By September 2011, it was already clear that Sindh at least was as badly affected by flooding this year as it had been last year. The causes in 2011 were different though, and had less to do with flooding in the Indus than the breakdown of a major drainage system. Whatever the reason, 80% of the standing crop in Sindh was estimated to have been damaged. Other than the local impacts on incomes and livelihoods, the damage has implications for the national economy - the production of cotton is estimated to have fallen almost 3 million bales short of the target of 15 million largely due to the disaster in the province. Although still higher than the 11 billion bales produced in 2010/11, the shortfall in cotton production in the second consecutive year is bad news and will only serve to retard the recovery.
Energy Crisis Now Acute
Oil and gas companies (including the two public sector gas utilities) were commissioning studies on the energy sector a decade ago and the (almost) universal message of more than one model was that gas would start running out by 2010. Why nothing much was done about this by successive governments, in spite of the obvious predictability of the problem, is a mystery. The monster is now well and truly upon us. Since 2008, economists have been talking about how the power crisis alone is shaving off one or two percentage points from annual GDP growth. Three years down the line, this is looking like a conservative estimate.
Thanks to the fact that nobody actually collects data on industrial production in Pakistan (except for half-hearted attempts to get data from the really big players at the end of the fiscal year), there is little information out there. The only available State Bank data shows sharp falls in production of automobiles, metal industries and engineering industries in July 2011 relative to July 2010. The situation is likely to have gotten worse, given that gas supply to textile mills is reportedly being curtailed from January 2011, and supply to fertilizer plants has been restricted for the last three months.
Most of the damage stemming from the energy shortage will of course accrue in the small and medium enterprise sector, which is largely undocumented. The extent of the impact can be judged not from data but from the protests, demonstrations and civil unrest centered on demands for power and gas, that have broken down again and again in cities like Faisalabad over the last few months. As this column is being written, protests are going on in all cities between Lahore and Rawalpindi to the extent that major roads are blocked and traffic suspended. Shades of Central America in the 1970s?
So far, the government's response has been to jack up prices. But with actual supply running short, this is not a feasible solution. Unfortunately most technical solutions are long-term, while management solutions (that will in any case only take care of part of the problem) seem to be beyond the government's capability.
A Loose Monetary Policy Continues to Haunt
With the IMF program having ended without the disbursement of the last two tranches of $3.6 billion, US aid (both military and economic) more or less suspended, and no other major inflows on the capital account, the government is increasing its dependence on borrowing from the central bank. In the first four months of the current fiscal, ie from July to October 2011, total borrowing from the State Bank amounted to Rs305 billion, or Rs2.5 billion a day. This is Rs0.7 billion higher than the borrowing of Rs1.8 billion per day at the approximately the same time last year. In this last year before the elections, it seems that the government plans to pull out all stops and just use the central bank like a printing press to fund even the current expenditure. The idiocy of this is hard to articulate. This is precisely the time to go over the budget with a fine-tooth comb and prune in all sectors, including a few sacred cows. But that requires a degree of credibility that is absent.
Given the rampant money creation, it's a bit hard to see how the government has managed to restrain growth in the CPI (or inflation) to just 10%, compared to 15% (comparing year on year inflation between November 2011 and the same month in 2010), as is being claimed. It may be that this is a statistical artifact made possible by the change in base year effected from 2011. If so, one would hope that the government would have the integrity to disclose how the data is being calculated, and will not be basing policy on such false information.
Pressure on the External Account
Luckily, oil prices are currently at about $100 a barrel, and are unlikely to rise much above $110 in 2012, given the global recession. Thank God for small blessings, for without this respite, the current account would have been under even more pressure. The deficit in the first quarter is estimated at $1.3 billion, compared to a deficit of $543 million in the first quarter of the last fiscal year. This is due at least partly to the significant fall in international prices of cotton yarn. Pakistan's exports have been riding on a commodity price boom over the last two years, but that seems to be tapering off.
The reserves held by the State Bank were just above $14 billion in end December 2011. Commercial banks are holding another $3 billion. This would make for a somewhat comfortable position if exports were to hold up, and if no major outflows were expected. But with some commodity prices crashing (by some estimates, the fall in cotton prices worldwide is of the tune of 58% over the last year) and repayments against the IMF loan beginning in February 2012 (a total of $1.2 billion has to be repaid this year), the external account could come under pressure by the end of the fiscal year. The markets are picking up on this, as is evident from the way the currency has depreciated - at 4.5% in the first two quarters of this fiscal year.
Domestic Debt
The government's domestic debt has almost doubled between FY2009 and FY2011 - from Rs3.8 trillion to just over Rs6 trillion. Domestic debt is now equivalent to 33% of the GDP. This may not sound like much when compared to the horrifying balance sheets being publicized in Europe lately, but then Pakistan is not a country that ever had the option of borrowing freely from international markets.
The domestic debt of public sector enterprises alone is estimated at Rs411 billion, compared to Rs290 billion two years ago. If there was ever a part of the economy that was crying out for restructuring, this was it. And this is one of the few areas where the government can actually do something if it tried. It will be painful - will involve funding golden handshakes, dealing with strong unions, unmasking irregularities, etc etc. And it may be only 6% of the total domestic debt, but then again, it's also the only 6% that can be actually dealt with relatively effectively.
So how will FY2012 pan out? There are still six months to go and one can always hope for a miracle. Judging by current trends though, there won't be much to cheer about come June.
The last fiscal year, which ended on 30 June 2011, was a bad one for Pakistan's economy, not least because of the devastation wreaked by the August 2010 floods. Half way through the current fiscal year, things once again look glum. Growth forecasts are being revised down (from an ambitious 4.2% to a still ambitious 3.6%). Let's look at five of the key factors that will influence the economy in the current fiscal year.
Another Set of Floods in Sindh
By September 2011, it was already clear that Sindh at least was as badly affected by flooding this year as it had been last year. The causes in 2011 were different though, and had less to do with flooding in the Indus than the breakdown of a major drainage system. Whatever the reason, 80% of the standing crop in Sindh was estimated to have been damaged. Other than the local impacts on incomes and livelihoods, the damage has implications for the national economy - the production of cotton is estimated to have fallen almost 3 million bales short of the target of 15 million largely due to the disaster in the province. Although still higher than the 11 billion bales produced in 2010/11, the shortfall in cotton production in the second consecutive year is bad news and will only serve to retard the recovery.
Energy Crisis Now Acute
Oil and gas companies (including the two public sector gas utilities) were commissioning studies on the energy sector a decade ago and the (almost) universal message of more than one model was that gas would start running out by 2010. Why nothing much was done about this by successive governments, in spite of the obvious predictability of the problem, is a mystery. The monster is now well and truly upon us. Since 2008, economists have been talking about how the power crisis alone is shaving off one or two percentage points from annual GDP growth. Three years down the line, this is looking like a conservative estimate.
Thanks to the fact that nobody actually collects data on industrial production in Pakistan (except for half-hearted attempts to get data from the really big players at the end of the fiscal year), there is little information out there. The only available State Bank data shows sharp falls in production of automobiles, metal industries and engineering industries in July 2011 relative to July 2010. The situation is likely to have gotten worse, given that gas supply to textile mills is reportedly being curtailed from January 2011, and supply to fertilizer plants has been restricted for the last three months.
Most of the damage stemming from the energy shortage will of course accrue in the small and medium enterprise sector, which is largely undocumented. The extent of the impact can be judged not from data but from the protests, demonstrations and civil unrest centered on demands for power and gas, that have broken down again and again in cities like Faisalabad over the last few months. As this column is being written, protests are going on in all cities between Lahore and Rawalpindi to the extent that major roads are blocked and traffic suspended. Shades of Central America in the 1970s?
So far, the government's response has been to jack up prices. But with actual supply running short, this is not a feasible solution. Unfortunately most technical solutions are long-term, while management solutions (that will in any case only take care of part of the problem) seem to be beyond the government's capability.
A Loose Monetary Policy Continues to Haunt
With the IMF program having ended without the disbursement of the last two tranches of $3.6 billion, US aid (both military and economic) more or less suspended, and no other major inflows on the capital account, the government is increasing its dependence on borrowing from the central bank. In the first four months of the current fiscal, ie from July to October 2011, total borrowing from the State Bank amounted to Rs305 billion, or Rs2.5 billion a day. This is Rs0.7 billion higher than the borrowing of Rs1.8 billion per day at the approximately the same time last year. In this last year before the elections, it seems that the government plans to pull out all stops and just use the central bank like a printing press to fund even the current expenditure. The idiocy of this is hard to articulate. This is precisely the time to go over the budget with a fine-tooth comb and prune in all sectors, including a few sacred cows. But that requires a degree of credibility that is absent.
Given the rampant money creation, it's a bit hard to see how the government has managed to restrain growth in the CPI (or inflation) to just 10%, compared to 15% (comparing year on year inflation between November 2011 and the same month in 2010), as is being claimed. It may be that this is a statistical artifact made possible by the change in base year effected from 2011. If so, one would hope that the government would have the integrity to disclose how the data is being calculated, and will not be basing policy on such false information.
Pressure on the External Account
Luckily, oil prices are currently at about $100 a barrel, and are unlikely to rise much above $110 in 2012, given the global recession. Thank God for small blessings, for without this respite, the current account would have been under even more pressure. The deficit in the first quarter is estimated at $1.3 billion, compared to a deficit of $543 million in the first quarter of the last fiscal year. This is due at least partly to the significant fall in international prices of cotton yarn. Pakistan's exports have been riding on a commodity price boom over the last two years, but that seems to be tapering off.
The reserves held by the State Bank were just above $14 billion in end December 2011. Commercial banks are holding another $3 billion. This would make for a somewhat comfortable position if exports were to hold up, and if no major outflows were expected. But with some commodity prices crashing (by some estimates, the fall in cotton prices worldwide is of the tune of 58% over the last year) and repayments against the IMF loan beginning in February 2012 (a total of $1.2 billion has to be repaid this year), the external account could come under pressure by the end of the fiscal year. The markets are picking up on this, as is evident from the way the currency has depreciated - at 4.5% in the first two quarters of this fiscal year.
Domestic Debt
The government's domestic debt has almost doubled between FY2009 and FY2011 - from Rs3.8 trillion to just over Rs6 trillion. Domestic debt is now equivalent to 33% of the GDP. This may not sound like much when compared to the horrifying balance sheets being publicized in Europe lately, but then Pakistan is not a country that ever had the option of borrowing freely from international markets.
The domestic debt of public sector enterprises alone is estimated at Rs411 billion, compared to Rs290 billion two years ago. If there was ever a part of the economy that was crying out for restructuring, this was it. And this is one of the few areas where the government can actually do something if it tried. It will be painful - will involve funding golden handshakes, dealing with strong unions, unmasking irregularities, etc etc. And it may be only 6% of the total domestic debt, but then again, it's also the only 6% that can be actually dealt with relatively effectively.
So how will FY2012 pan out? There are still six months to go and one can always hope for a miracle. Judging by current trends though, there won't be much to cheer about come June.
At least we don't have more poor than Africa.
