Pakistan's economy lands in deflation

[SrNair]

Nair saab base year change will increase Pak GDP 50%. This is what happens in rest of the world, GDP growth rate change is India only thing.

I dont think so.
We changed our base year .But our nominal GDP is still remain as 2 trillion.

 

[LeveragedBuyout]

@LeveragedBuyout - a little help here sir?Ur area of expertise.Deflation and how possible it is,how much effect it can really have?

The article actually did a good job presenting its case for why deflation is happening, but I will summarize it here:

-The Wholesale Price Index has been falling, meaning the price that producers receive when selling their products to wholesalers has been declining
-Consumers see prices fall, and expect them to fall further, so delay purchases (aka demand destruction)
-Tight fiscal policy (e.g. low government spending, high taxes) reduces demand
-Tight monetary policy (e.g. high interest rates, slowing or decreasing money supply) reduces credit availability for both consumers and producers


What are the effects?

-Businesses reduce investment, because projects are no longer profitable at lower prices
-Businesses reduce production, leading to higher unemployment
-Consumers further delay purchases, because they know that if they wait longer, prices will fall further
-Debt burdens increase in real terms. Under inflation, a business makes more nominal profits because of rising prices, while the nominal debt (and thus, interest expense) doesn't change. Under deflation, businesses make less profit because of falling prices, while the nominal debt doesn't change.

Allow me to counter those here who say that this is due to the collapse in oil prices, so there's nothing to worry about. If that were the case, lower oil prices would encourage people or companies to buy and use more oil, since it's suddenly cheaper both on an absolute level and vs. alternatives (e.g. people may fly more now that jet fuel is less expensive vs. taking the train). But instead, oil imports have been slowing (according to the article) even as prices have been falling, which means that underlying demand in the economy is also softening. That's not a good sign.

Demand drives economies, because when demand is high and supply is low, prices rise; companies make more profits, pay more taxes, invest in more capacity, hire more employees, and pay them more. That's what everyone likes to see. When demand is weak, the opposite happens: prices fall, companies make less profit, pay less taxes, cut back on investments, fire employees, and restrain wages. Diverging views on how to stimulate demand form the basis for the major political-economic schools of thought (Left: government should spend more to make up for falling demand in the "real economy"; Right: government should cut taxes so people can keep and spend more of the money they earned).

Disinflation (slowing inflation) and outright deflation is a problem that is affecting most of the world these days, primarily because most countries are trying to export their way to growth, and there is overcapacity. There aren't enough buyers for all of the products that companies are making, so companies are forced to cut prices to sell their product. Oil is a great example: fracking in the US dramatically increased supply, and since OPEC didn't cut production levels, the price has plummeted.

The oil market is also a good representative of the solution to deflation: time. Eventually, companies/projects that are unprofitable will go bankrupt, and supply will be withdrawn from the market as these oil suppliers disappear. The oil price will stabilize, and then deflation will gradually go away as demand for oil exceeds this reduced supply.

Remember, prices depend not just on supply, but also demand. That's the reason why Europe and Japan are having trouble solving the deflation problem, and why time is also making their problems worse. Since the demographics of Europe and Japan are rather poor, their populations are shrinking, naturally reducing demand. In a country like Pakistan, where the population is increasing, there is a natural boost to demand over time, since there are literally more consumers every year. That's why the default problem for Pakistan has been inflation, while the default problem for Japan/Europe has been deflation.

 

[farhan_9909]

Population is not a matter here since we are still developing with around 7+%.
And 2 trillion $ is indeed 2 trillion.Population is not a factor in there.

Lol

35% .Extra ordinary.

Baseyear change will show high GDP growth.But wont show real nominal GDP rise.It will still remain as 250 billion$.

Well 35% is the worst case scenerio,some people consider it to increase by as much as 70%,even surpassing the nigerian increase(60%) last r or the Bangladesh increase in 2013(30%).


Indian GDP is very well documented unlike Pakistan

BBC News - Nigeria becomes Africa's biggest economy

 

[ajpirzada]

not so correct. There are two questions to consider: 1) why is it happening?; and, 2) what is the nature of economy?

Answer to the first question will give you a rough picture of the economy. Yes, it is unlikely that all the recent episodes of high inflation were demand driven. But equally so, the recent fall inflation is also not driven by any contraction in demand. It was all to do with energy prices which enter firms' cost of production. Even if you take out the direct effect of energy prices out of your price index, it will still show up indirectly since now it is cheaper for the firms' to produce whatever they were producing before. Therefore such a deflationary episode is not necessary a reflection of poor economic environment. Rather it should help the economy since now the cost of production for the firms has gone down.

The second question is important in the context of if such a deflationary episode is desirable or not? Irrespective of the cause of deflation, it can still be good or bad for the economy. This depends on the balance sheet of the private sector firms. In other words, if the private sector is heavily dependent on debt (loans), then fall in the general prices increases the real debt burden for the firms. And as far as I know, most of the businesses in Pakistan are not heavily dependent on debt.

So all in all, this shouldnt be a bad news for Pakistan's economy.

 

[SrNair]

Well 35% is the worst case scenerio,some people consider it to increase by as much as 70%,even surpassing the nigerian increase(60%) last r or the Bangladesh increase in 2013(30%).


Indian GDP is very well documented unlike Pakistan

BBC News - Nigeria becomes Africa's biggest economy

No Indian economy is not very well documented .Still not perfect even after these base year change.
I dont know about Pakistan.But AFAIK
base year change will only add some valid economic data ,wont change nominal GDP.
Then it is so easy to countries to increase their nominal GDP by regularly changing base year

 

[Kabira]

I dont think so.
We changed our base year .But our nominal GDP is still remain as 2 trillion.

In case of Pakistan if base year is finally changed then GDP will increase 50%. Bangladesh GDP went from $110b to $185b because of change in base year. India just changed the way they calculate growth rate which is why its over 7% right now.

 

[farhan_9909]

No Indian economy is not very well documented .Still not perfect even after these base year change.
I dont know about Pakistan.But AFAIK
base year change will only add some valid economic data ,wont change nominal GDP.
Then it is so easy to countries to increase their nominal GDP by regularly changing base year

Pakistan GDP base year chnage will be followed under IMF,so don't worry our numbers will be credible.

Bangladesh=Change from 115Bn Dollars to 184Billion dollars
Nigeria=60% increase to become the largest GDP of Africa

http://www.app.com.pk/en_/index.php?option=com_content&task=view&id=254374&Itemid=1

Pakistan informal GDP is 91% or even more(170%) and yes don't be surprised if after change in base year,our GDP even increase by more than 100% or say become 500Billion dollars+

Size of informal economy at 91.4 percent of GDP: study - thenews.com.pk

Infact don't be surprised if Pakistan even replaces sri lanka in GDP per capita income in South asia after the change in base year.Though i am not 100% sure about this

 

[45'22']

Pakistan GDP base year chnage will be followed under IMF,so don't worry our numbers will be credible.

Bangladesh=Change from 115Bn Dollars to 184Billion dollars
Nigeria=60% increase to become the largest GDP of Africa

Associated Press Of Pakistan ( Pakistan's Premier NEWS Agency ) - Base year for national accounts to change every 10 years: Dar

Pakistan informal GDP is 91% or even more(170%) and yes don't be surprised if after change in base year,our GDP even increase by more than 100% or say become 500Billion dollars+

Size of informal economy at 91.4 percent of GDP: study - thenews.com.pk

Infact don't be surprised if Pakistan even replaces sri lanka in GDP per capita income in South asia after the change in base year.Though i am not 100% sure about this

Bangladesh's gdp is 184billion $ according to the old base year not the new one

If they change it to 2010/2015......it will further increase

 

[Bilal.]

This won't work in the present situation. Monetary stimulus (reduction in interest rate) has not worked in Japan and Europe thus far. For starters, you need to sort out your energy crisis first to get your manufacturing sector and industries to start working again.

It's not actually a deflationary pressure as seen in Europe and Japan. Europe and Japan have hit what one can call peak demand due to their already high income bad demographic situation(ageing and shrinking population). This deflation in Pakistan has been caused by falling oil and electricity price. Otherwise till last year inflation has been quite high. On the other hand it does provide an opportunity to further cut intesrest rate without causing inflation going of the charts.

 

[farhan_9909]

Bangladesh's gdp is 184billion $ according to the old base year not the new one

If they change it to 2010/2015......it will further increase

ofcourse it will further increase with the change in base year.

but pakistan GDP is the least documented in South asia.

 

[Ray_of_Hope]

ofcourse it will further increase with the change in base year.

but pakistan GDP is the least documented in South asia.

A general question as i m no expert on economic matters.
Deflation.Is it good or bad for pakistan????

 

[45'22']

ofcourse it will further increase with the change in base year.

but pakistan GDP is the least documented in South asia.

What's the base year for you guys

 

[definitelynotIndian]

Deflation is bad for economy as it discourages increase in production. an inflation of 4-5% should be good for a developing economy.

 

[SrNair]

Pakistan GDP base year chnage will be followed under IMF,so don't worry our numbers will be credible.

Bangladesh=Change from 115Bn Dollars to 184Billion dollars
Nigeria=60% increase to become the largest GDP of Africa

Associated Press Of Pakistan ( Pakistan's Premier NEWS Agency ) - Base year for national accounts to change every 10 years: Dar

Pakistan informal GDP is 91% or even more(170%) and yes don't be surprised if after change in base year,our GDP even increase by more than 100% or say become 500Billion dollars+

Size of informal economy at 91.4 percent of GDP: study - thenews.com.pk

Infact don't be surprised if Pakistan even replaces sri lanka in GDP per capita income in South asia after the change in base year.Though i am not 100% sure about this

Then that will only create false economic expansion. I will agree with you if you can show the striking ground realities in Pakistan is on par with those data.If you have been that level.of economic expansion you wouldnt face these much.of power shortage and pressure.500billion$ means .Now you have around more than 700 billion $ economy.Then where is your industrial activity? What about the FDI?
We cant see that level of economic rise among common Pakistanies.

It is quite astonishing .You have an average 10 hr power cut in major cities yet you have that much of industrial activity.
AFAIK these deflation was created due to lack of money or lack.of interests in purchasing from markets.IMF alreadyis a reason.
Underground economy cant be add in economic data.
Even Indonesia has only around 950 billion $economy.But they have proof of prosperity in there.

In case of Pakistan if base year is finally changed then GDP will increase 50%. Bangladesh GDP went from $110b to $185b because of change in base year. India just changed the way they calculate growth rate which is why its over 7% right now.

Well base year isfor creating more inclusivness in data not for spiking nominal GDP

 

[ahmadalam99]

Pakistan eco is all likely to.prosper in comming years