GDP growth rate of over 5.5pc to hurt economy: Shaukat Tarin

[Norwegian]

Again, you are uttering bongiyan after bongiyan like as if you know a thing or two.

I'll ask you for the third time, why can't the incompetent PTI Government reduce the trade deficit back to $20 billion like it was back in the good old days of 2013?

It's a simple question. Which part of it you don't understand?

Or, are you thinking maybe today Pakistan needs those $20 billion of extra imports but between between 2013-2018, somehow it didn't?

Are you simply that daft that you think imports were increased unnecessarily when country was suffering 18-hours of load-shedding and economy was badly suffering?

Do you even know that Pakistani population had increased from around 190 million in 2013 to around 211 million in 2018?

Was 126-day long dharna going to pay for this increase which cost the country 2% GDP loss or did some invisible industry exist in Pakistan that was going to somehow sustain the increase of 21 million people?

What about $12.5 billion of external debt that was rescheduled with the Paris in December 2001 tobe after a 15-years grace period?

Told you we are debating with a brick here

 

[Jungibaaz]

A very deep analysis on your part regarding role of SBP. Few people understand the actual role of SBP ( summarized in your statement perfectly)

SBP is doing exactly what you said. In Pakistan there has never been a more professional SBP team doing what they are supposed to do. Making use of tools at their disposal perfectly (currency, intervention and policy rate). Basically fight the volatility, speculation and make the transition subtle ( both ways appreciarion/depreciation).
They didn't let the currency appreciate (at one point just on market our REER crossed 100 in March and that level was unsustainable so depreciation was on cards) and also didn't let the currency depreciate on auto and intervined ($1.2b, which has stopped in the recent week as sentiment and speculation is dying) and to subtle the impact not manipulated the outcome ( fought against developing Afghan situation, international commodity inflation cycle and resulting speculation especially in the backdrop of IMF negotiation) maintained a supportive REER value. ( REER value fell to 94-96 in October).

Now our currency is very close to where it should be given our macros. In the range of 165-170 ( our currency will be perfectly placed at 96-98, making an ideal environment for local industrialization and exports negating the effects of higher energy ( electricity) prices. We have cheaper gas and diesel)

Yes I know the swings in REER value are on a higher side (+/- 3) but this has more to do with Pakistan not been a mature market ( just a few years on market based currency), Capacity of state Bank to regulate and the holistic unprofessional market to deal with where speculation triumph indicators.

If we were to truely analyse currency, it should be seen in sufficient time frame ( that's what investors or businesses look at). From 2019 to 2021 that comes at around ~5%. From October 2020 to October 2021 ~6%. The sudden depreciation when we moved from away fixed and subsequent currency catching up can easily be explained. From 2013-2021 5-6%.

Every developing world currency not artificially fixed depreciates against developed country. The only way to make it more stable and in line with currencies of e.g. India and Bangladesh is to increase your dollar earnings ( stability in macros).

Agree.

 

[Pak Nationalist]

Higher growth rate is OK if it is led by high exports but that is not the case with Pakistan. We are an imports led economy all thanks to consistent efforts of Ishaq dollar. This exactly what he did by increasing imports which increased our CAD to record level and increased external financing need from 5-6 Billion to almost 15 billion.

I suspect there was a method to that madness too. Pakistan needed power and it needed it fast. Power plants, construction machinery, etc needed to be imported. It would have cost us a fortune in terms of the project costs (under the head of construction material imports) if the imports were not cheaper, so PKR was artificially kept stronger to execute projects while putting as limited as a possible burden on the budget.

Even the growth spurt in Musharraf days was drained out because the economy grew too quickly, the domestic productive capacity was minimal and imports had to be arranged to meet the domestic demand that was buttressed by higher disposable incomes of a rapidly growing middle class.

Solution (long term) remains import substitution. The key to that is going to be your support to small and medium enterprises. These businesses must attain scale to boost the overall productivity of the economy. How to do that? Dirt cheap credit availability, forcing banks to begin doing their actual job i.e. financing growth/business expansion by taking risk (profit is linked to risk). The government would have to contain crowding out the private sector/competing with the private sector in terms of securing financing (fiscal deficit management by domestic debt accumulation). Once SME sector begins achieving scale, more and more entrepreneurs would be encouraged to use their labor and capital to produce real wealth. A process of industrialization would be started. Easy money through speculation is the enemy of real growth here. "Commercial" banks are hooked to risk free investment in government securities (debt), while investor dumps/locks capital in real estate to drive up the prices of land and mint easy money without breaking a sweat.

It is not that it is not doable. It is, but poltical will is required to fix the political economy of this country and taking on entrenched interest groups (mafias, lobbies, whatever) head on.

BTW, SBP has taken a step in the right direction recently.

SBP to finance eight banks at 1pc for collateral-free lending to SMEs

SMEs’ access to bank financing remains low due to a number of factors including lack of collateral and perceived high risk.

www.dawn.com

 

[Pak Nationalist]

Macro economy is not run on your opinions. It's based on facts on the ground. Pakistan has no extra dollars to spare like China so that it could artificially control price of USD. That's why it should be left to the free market. SBP should only intervene if USD gets too cheap naturally according to real effective exchange rate and should never artifically support a fix dollar price. Keep the dollar flying. It's the only way to develop Pakistani economy from import based to export based. Good luck

Keep the dollar flying

The fear of flexibility in the exchange rate has been shared by most, if not all, our finance ministers.

www.dawn.com

View attachment 790727

A middle path is necessary. When the purchasing power of the average Pakistani is already in the gutters, you cannot allow unending bouts of devaluation of PKR. Central banks in third-world economies have to intervene. However, the intervention must be done sparingly, so the precious dollar reserves that are already built from borrowed money are not burnt to defend what in some situations becomes a lost cause.

 

[Patriot forever]

I suspect there was a method to that madness too. Pakistan needed power and it needed it fast. Power plants, construction machinery, etc needed to be imported. It would have cost us a fortune in terms of the project costs (under the head of construction material imports) if the imports were not cheaper, so PKR was artificially kept stronger to execute projects while putting as limited as a possible burden on the budget.

Even the growth spurt in Musharraf days was drained out because the economy grew too quickly, the domestic productive capacity was minimal and imports had to be arranged to meet the domestic demand that was buttressed by higher disposable incomes of a rapidly growing middle class.

Solution (long term) remains import substitution. The key to that is going to be your support to small and medium enterprises. These businesses must attain scale to boost the overall productivity of the economy. How to do that? Dirt cheap credit availability, forcing banks to begin doing their actual job i.e. financing growth/business expansion by taking risk (profit is linked to risk). The government would have to contain crowding out the private sector/competing with the private sector in terms of securing financing (fiscal deficit management by domestic debt accumulation). Once SME sector begins achieving scale, more and more entrepreneurs would be encouraged to use their labor and capital to produce real wealth. A process of industrialization would be started. Easy money through speculation is the enemy of real growth here. "Commercial" banks are hooked to risk free investment in government securities (debt), while investor dumps/locks capital in real estate to drive up the prices of land and mint easy money without breaking a sweat.

It is not that it is not doable. It is, but poltical will is required to fix the political economy of this country and taking on entrenched interest groups (mafias, lobbies, whatever) head on.

BTW, SBP has taken a step in the right direction recently.

SBP to finance eight banks at 1pc for collateral-free lending to SMEs

SMEs’ access to bank financing remains low due to a number of factors including lack of collateral and perceived high risk.

www.dawn.com

An excellent post. Just one correction.

Power machinery imports were basically investments with high ROI on take or pay contracts.
By nature as investment they don't effect your CAD or reserves. Because these were purchased (outflow) against capital flowing in the form of FDI (inflow) ( Remember the high FDI plmn touts about, it was basically these flows). Covers both the machinery costs and brick and mortar component of these power plants.

Basically it is balanced off by SBP and after that CAD is calculated.

For easy understanding, I will give an another example 'vaccine imports'.
Now these vaccines (not all but a significant part of it) is financed through WB funding ( remember the corona virus package by WB).
These vaccines imports are balanced off by SBP before releasing CAD.

Furthermore a lot of the plants were still under construction and are coming online even today ( thus the continuous piling up/growth of capacity payments).


Anyone who says CAD was increased because of power plants only needs to be laughed at.

 

[Pak Nationalist]

An excellent post. Just one correction.

Power machinery imports were basically investments with high ROI on take or pay contracts.
By nature as investment they don't effect your CAD or reserves. Because these were purchased (outflow) against capital flowing in the form of FDI (inflow) ( Remember the high FDI plmn touts about, it was basically these flows). Covers both the machinery costs and brick and mortar component of these power plants.

Basically it is balanced off by SBP and after that CAD is calculated.

For easy understanding, I will give an another example 'vaccine imports'.
Now these vaccines (not all but a significant part of it) is financed through WB funding ( remember the corona virus package by WB).
These vaccines imports are balanced off by SBP before releasing CAD.

Furthermore a lot of the plants were still under construction and are coming online even today ( thus the continuous piling up/growth of capacity payments).


Anyone who says CAD was increased because of power plants only needs to be laughed at.

Were all plants set up as a result of FDI? I suspect Chinese EXIM bank financed loans (funding) for at least a few of these projects. It makes no sense to keep PKR overvalued otherwise. Was it to contain domestic inflation that a weaker PKR would usher in? World had extremly low commodity prices back then.

 

[Patriot forever]

Were all plants set up as a result of FDI? I suspect Chinese EXIM bank financed loans (funding) for at least a few of these projects. It makes no sense to keep PKR overvalued otherwise. Was it to contain domestic inflation that a weaker PKR would usher in? World had extremly low commodity prices back then.

The Chinese companies took loans from EXIM Bank and invested in Pakistan at high ROI under sovereign guarantees on 'take or pay' basis.
I wish it was as you said, we would have owned the plants and avoided the menance of high ROI and capacity payments, just had to deal with debt and interest payment ( can't be more than 8%).

All of these are IPP's under 2015 policy. We do not own any of these plants.

Apart from few road projects (which are financed by concessionary loans by Chinese Government) all of CPEC is based on this structure.


Yes it was to contain domestic inflation. Basically SBP printing/ injection ( money supply in the market) balanced off by flooding of imports and increased consumption ( GDP growth).

 

[Norwegian]

A middle path is necessary. When the purchasing power of the average Pakistani is already in the gutters, you cannot allow unending bouts of devaluation of PKR. SBP is third world economies has to intervene. However, the intervention must be done springly, so the precious dollar reserves that are already built from borrowed money are not burnt to defend what in some situations becomes a lost cause.

As long USD price is not fixed and follows real effective exchange rate, dollar reserves won't drain

 

[Norwegian]

The Chinese companies took loans from EXIM Bank and invested in Pakistan at high ROI under sovereign guarantees on 'take or pay' basis.
I wish it was as you said, we would have owned the plants and avoided the manance of high ROI and capacity payments, just had to deal with debt and interest payment ( can't be more than 8%).

All of these are IPP's under 2015 policy. We do not own any of these plants.

Apart from few road projects (which are financed by concessionary loans by Chinese Government) all of CPEC is based on this structure.

Pmln signed on death sentence of Pakistani economy. @ziaulislam is right. There are forces still protecting this anti Pakistan party

 

[Patriot forever]

A middle path is necessary. When the purchasing power of the average Pakistani is already in the gutters, you cannot allow unending bouts of devaluation of PKR. SBP is third world economies has to intervene. However, the intervention must be done springly, so the precious dollar reserves that are already built from borrowed money are not burnt to defend what in some situations becomes a lost cause.

As far as purchasing power is concerned. Here are the GNI per capita income figures, which grew in 2021 more than any year in plmn government. Please remember GDP nominal has crossed Rs 47.7t in 2021 and will be Rs 53-55t if not more by the end of this year. Just the mo ey flowing in agriculture has doubled, remittances in PKR have more than doubled so have exports in PKR ( growth + devaluation).

Per capita income in PKR which was 190k in 2018 is now 245k and this year end projection is 280k.

I understand that 2019 and 2020 the gap become income and inflation grew and it was tough going ( I can not lie as data clearly indicates tha. But since FY 2021 inflation has caught up with income, FY 2022 final figures will be even better.

Now coming to 2nd part yes SBP is doing exactly as you mentioned. Please see my previous post on this thread. The risk of runaway is negligible. It's all calculated intervention ( its because of IMF negotiations as well that SBP did not contain rupee at 96-98 REER value and also because most of it beyond that level was due to speculation rather than fundamentals).

 

[Pak Nationalist]

As far as purchasing power is concerned. Here are the GNI per capita income figures, which grew in 2021 more than any year in plmn government. Please remember GDP nominal has crossed Rs 47.7t in 2021 and will be Rs 53-55t if not more by the end of this year. Just the mo ey flowing in agriculture has doubled, remittances in PKR have more than doubled so have exports in PKR ( growth + devaluation).

Per capita income in PKR which was 190k in 2018 is now 245k and this year end projection is 280k.

I understand that 2019 and 2020 the gap become income and inflation grew and it was tough going ( I can not lie as data clearly indicates tha. But since FY 2021 inflation has caught up with income, FY 2022 final figures will be even better.


View attachment 790833View attachment 790835View attachment 790832

Now coming to 2nd part yes SBP is doing exactly as you mentioned. Please see my previous post on this thread. The risk of runaway is negligible. It's all calculated intervention ( its because of IMF negotiations as well that SBP did not contain rupee at 96-98 REER value and also because most of it beyond that level was due to speculation rather than fundamentals).

After the financial carnage of 2017-18, the per capita income has barely gone back to the 2017 level. My comment about SBP's calibrated interventions was in response to @Norwegian who is a proponent of completely free float. I know that SBP has already burned at least a billion dollars to defend the PKR. I think instability and financial collapse in Afghanistan have had a more pronounced impact on our forex position than many realize or are yet to realize. As soon as SBP instated the biometric verification order, the dollar buying in forex markets has drastically reduced. This could also mean that some of that business is now being conducted in the black market. To jack up LSM figures, a shortsighted, repeated and time-tested policy (again from Musharraf era's consumer-driven bubble of economic growth) of subsidizing automobile "ASSEMBLING" (pathetic levels of indigenization in the auto sector despite tall claims) was adopted. Subsidized in the shape of low SBP interest rates that encourage commercial banks to roll out car finance loans, thereby expending precious credit to finance IMPORT of SKD/CKD kits for assemblage in auto plants. GoP in fact subsidized a luxury import that further aggravated the BoP crisis and weakened PKR. The precious credit that small or medium-size business craves for went to finance imports.

Only export-led growth in Pakistan could be sustainable and pave the way to 7% plus annual growth in GDP once exports begin to cover most (preferably all) of imports. Export growth creates space and generates capital for businesses to further invest in capacity expansion. The foreign investor rides on the train once he sees domestic investment picking up among other things. BD started attracting FDI once it established its credentials as a producer. There should not be anything else on our tongues other than EXPORT, EXPORT, EXPORT. That's the only redemption, the only way to break this vicious cycle we are stuck in since the late 1980s.

As far as purchasing power is concerned. Here are the GNI per capita income figures, which grew in 2021 more than any year in plmn government. Please remember GDP nominal has crossed Rs 47.7t in 2021 and will be Rs 53-55t if not more by the end of this year. Just the mo ey flowing in agriculture has doubled, remittances in PKR have more than doubled so have exports in PKR ( growth + devaluation).

Per capita income in PKR which was 190k in 2018 is now 245k and this year end projection is 280k.

I understand that 2019 and 2020 the gap become income and inflation grew and it was tough going ( I can not lie as data clearly indicates tha. But since FY 2021 inflation has caught up with income, FY 2022 final figures will be even better.


View attachment 790833View attachment 790835View attachment 790832

Now coming to 2nd part yes SBP is doing exactly as you mentioned. Please see my previous post on this thread. The risk of runaway is negligible. It's all calculated intervention ( its because of IMF negotiations as well that SBP did not contain rupee at 96-98 REER value and also because most of it beyond that level was due to speculation rather than fundamentals).

PS. this comparison of Per capita income in terms of PKR could be very misleading. The PKR figures for previous years are per the PKR value of today or from those days? Remember that PKR has devalued over nearly 50% since 2018.

 

[Crimson Blue]

This is probably the most important revelation about the state of Pakistani economy that I have read in past 12 months. So it appears that we cannot even tolerate the increased GDP expansion because even current all-time-high foreign reserves are not enough to absorb the burden of imports when economy is growing faster than 5.5%.

I have heard many economic experts & state official stating on record that Pakistan only need foreign reserves to cover the imports for 6 months.

After what happened with the spike in crude oil prices in 2008 and recent spike in economic growth proves that Pakistan needs foreign reserves at least amounting to 1/3 the size of her GDP. The outdated economic theory of Zia time of maintaining of foreign reserves to cover only 6 months worth of imports is just not good enough.

 

[ziaulislam]

Pmln signed on death sentence of Pakistani economy. @ziaulislam is right. There are forces still protecting this anti Pakistan party

The concept of my great leader was to avoid risk..see private investment is not backed by soverign grantees in most countries..high risk high return..no debt pile on govt..as its all investment..we cant default on those..unlike bonds where we can default

Wait..sorry i checked..what ??! we gave soverign grantee on those private IPPs too..hmm ..never mind..geo sharif..

This is probably the most important revelation about the state of Pakistani economy that I have read in past 12 months. So it appears that we cannot even tolerate the increased GDP expansion because even current all-time-high foreign reserves are not enough to absorb the burden of imports when economy is growing faster than 5.5%.

I have heard many economic experts & state official stating on record that Pakistan only need foreign reserves to cover the imports for 6 months.

After what happened with the spike in crude oil prices in 2008 and recent spike in economic growth proves that Pakistan needs foreign reserves at least amounting to 1/3 the size of her GDP. The outdated economic theory of Zia time of maintaining of foreign reserves to cover only 6 months worth of imports is just not good enough.

Reserves are not meant to be used in normal situation..check in dictionary the meaning of RESERVES

Reserves are there for natural disasters or shocks..if they start dropping during normal times people will panic

Investors are forward looking they peak 2 years in the future
Seems the economy is just doing fine at 5-5.5% growth when previously it will collape at mere 4% (pppp era 2012) growth(or under go zombie apoclapse at 5.2% in PMLN era with 24b deficit)

 

[Patriot forever]

After the financial carnage of 2017-18, the per capita income has barely gone back to the 2017 level. My comment about SBP's calibrated interventions was in response to @Norwegian who is a proponent of completely free float. I know that SBP has already burned at least a billion dollars to defend the PKR. I think instability and financial collapse in Afghanistan have had a more pronounced impact on our forex position than many realize or are yet to realize. As soon as SBP instated the biometric verification order, the dollar buying in forex markets has drastically reduced. This could also mean that some of that business is now being conducted in the black market. To jack up LSM figures, a shortsighted, repeated and time-tested policy (again from Musharraf era's consumer-driven bubble of economic growth) of subsidizing automobile "ASSEMBLING" (pathetic levels of indigenization in the auto sector despite tall claims) was adopted. Subsidized in the shape of low SBP interest rates that encourage commercial banks to roll out car finance loans, thereby expending precious credit to finance IMPORT of SKD/CKD kits for assemblage in auto plants. GoP in fact subsidized a luxury import that further aggravated the BoP crisis and weakened PKR. The precious credit that small or medium-size business craves for went to finance imports.

Only export-led growth in Pakistan could be sustainable and pave the way to 7% plus annual growth in GDP once exports begin to cover most (preferably all) of imports. Export growth creates space and generates capital for businesses to further invest in capacity expansion. The foreign investor rides on the train once he sees domestic investment picking up among other things. BD started attracting FDI once it established its credentials as a producer. There should not be anything else on our tongues other than EXPORT, EXPORT, EXPORT. That's the only redemption, the only way to break this vicious cycle we are stuck in since the late 1980s.

PS. this comparison of Per capita income in terms of PKR could be very misleading. The PKR figures for previous years are per the PKR value of today or from those days? Remember that PKR has devalued over nearly 50% since 2018.

Coming to the last part of your post.

People earn and spend in Pkr. GNI per capita in dollars is misleading. GNI per capita if calculated in dollars, commodity prices should also be calculated in dollars. If per capita income is taken in rupees, commodity prices should be in rupees.

Petrol was ~ 80c back than , it still costs ~ 80c. One can not compare that petrol costs 145 Rs now and back than it was ~90-100Rs based on per capita income in dollars, it doesn't makes sense. More appropriate to compare is per capita income in rupees than and now.

Basically its how much one can buy.


Coming to the first part.

Black Market primary source of dollars is forex market (Apart from smuggling currency which mostly occurs in the opposite direction, outward flow of dollars). Usually inward smuggling ends up in forex market.
Yes Afghanistan instability had put considerable stress on our forex market , almost to a tune of $6-7m per day both due to trade ( we were net recepients of dollars before) and smuggling.

Yes I agree with on the later part, we pushed the peddle too far but I am glad we rolled back in time. No doubt CKD/SKD imports, auto sales have surged. Government miscalculated the commodity inflation cycle. Had commodity prices been in mean range of last 5 yrs they were on track of their target of CAD of 7b.
But government does need growth and revenue, and we need a market as well if we are ever to become self reliant ( The auto industry is becomes more diverse with new entrants, when it becomes sufficiently competitive we will see further down the line localisation in parts as well). As long as they are taxed appropriately we will be fine in the long run. The commodity inflation cycle will ease when winter ends. After that CAD will come back in targeted range.

 

[Crimson Blue]

Reserves are not meant to be used in normal situation..check in dictionary the meaning of RESERVES

Reserves are there for natural disasters or shocks..if they start dropping during normal times people will panic

This post should be in funny jokes' section.