Pakistan's Economy Under-estimated, Karachi Equities Undervalued

[Just Jack]

Let's see: What Dr. Khan describes as "a patient in intensive care unit fighting desperately for survival" you describe as capable of running a marathon the next day, since "things are not bad as they seem". Uh-huh. Right.

"Growing gap between dismal official economic statistics and consumption boom .... is a challenge for many analysts....."

You are correct that the economy is not doing well. And the other fellow is also correct that conspicuous consumption is booming.

At first glance, this appears to be a paradox that puzzles everybody: the headline numbers indicate an economy in an abysmal state, but everywhere one looks, there are people shopping like there is no tomorrow.

So how is this possible?

ANSWER: There is no paradox. The answer is not at all surprising.

We do not need to look for complicated explanations in the shadows of reality like informal economy, underground consumption, over-invoicing of imports, under-invoicing of exports et cetera.

The explanation is a whole lot simpler than that.

To see how this works, go to the finance ministry:
http://www.finance.gov.pk/survey/chapter_12/01-GrowthAndStabilization.pdf

Look at Table 1.4 on Page 9 to see the "Composition of GDP Growth":

GDP = Consume + Invest + Exp-Imp
4.2% = 9.4% + (-1.4%) + (-3.8%)

Now we can see how obvious and unsurprising the answer to that "riddle" is. The gung-ho consumption we see (1st term on RHS) is simply coming at the cost of falling investment (2nd term on RHS)and at the cost of frittering away the remittances through consumptive net-imports (3rd term on RHS). Note the spectacular performance of Consumption (9.4% growth) in the context of the relatively dismal performance of GDP (4.2% growth on LHS).

Okay, we go next to Table I.4 in the APPENDIX and see "EXPENDITURE ON GROSS NATIONAL PRODUCT AT CONSTANT PRICES".

A) Look at the dramatic rise (in constant 2000 prices, i.e. no inflation) of:
1) Private Consumption Expenditure
2) General Govt. Current Consumption Expenditure
3) Import of Goods and Non-Factor Services

B) Then look at the collapse (in constant 2000 prices, i.e. no inflation) of:
1) Gross Domestic Fixed Capital Formation
2) Export of Goods and Non-Factor Services

C) Then look at the modest change (in constant 2000 prices, i.e. no inflation) of:
1) Expenditure on GDP at Market Prices

Again we can see how obvious and unsurprising the answer to that "challenging riddle" really is. Again we note the same implication. The gung-ho consumption we see (A1 & A2 terms) is coming at the cost of falling investment (B1 term) and at the cost of frittering away the remittances through consumptive net-imports (B2-A3). The GDP numbers in C(1) are still dismal.

SUMMARY: The boom in conspicuous consumption is coming at the expense of saving & investment. There is no miracle here. Just misguided people frittering away their seed-corn. The consumption boom we are witnessing is not sustainable and always ends in the same way: Financial Crisis, BOP crisis, Currency crisis, Total Macroeconomic Collapse.

 

[VCheng]

You are correct that the economy is not doing well. And the other fellow is also correct that conspicuous consumption is booming.

At first glance, this appears to be a paradox that puzzles everybody: the headline numbers indicate an economy in an abysmal state, but everywhere one looks, there are people shopping like there is no tomorrow.

So how is this possible?

ANSWER: There is no paradox. The answer is not at all surprising.

...............

SUMMARY: The boom in conspicuous consumption is coming at the expense of saving & investment. There is no miracle here. Just misguided people frittering away their seed-corn. The consumption boom we are witnessing is not sustainable and always ends in the same way: Financial Crisis, BOP crisis, Currency crisis, Total Macroeconomic Collapse.

Yes, I read this material the other time you posted it.

 

[RiazHaq]

Yes, I read this material the other time you posted it.

The explanation that the consumption is coming entirely at the expense of investment is totally false.
The gap between the officially reported consumption GDP and actual consumption GDP is just too large to be explained by it.

To understand the reason for the gap between official GDP which is under-reported and the actual GDP which is much larger, please read a recent paper by Kemal and Qasim presented at PSDE (Pak Society of Dev Economists) conference in Islamabad.

The paper goes into the details of the discrepancies between the Economic Survey GDP data and the Social and Living Standards (PSLM) consumption survey which is carried out and reported separately several months after the end of each fiscal year.

The PSLM data shows there's a huge gap between reported incomes and actual consumption in a largely cash-based economy.

Another issue the paper discusses is the rampant mis-invoicing of imports and exports that contributes to understating the official GDP.

For example, 2011-12 PSLM has not yet been completed.

http://www.pide.org.pk/psde/25/pdf/AGM28/M Ali Kemal and Ahmed Waqar Qasim.pdf

 

[manofwar]

you guys gotta revamp your economic valuation system guys.........last year the GDP was over estimated by 10%, now it is underestimated...........looks like the guys at GoP have been giving reports based on figures that they invented off their heads
I just hope that pakistan's military budget hasn't been undervalued too

 

[VCheng]

The explanation that the consumption is coming entirely at the expense of investment is totally false.
The gap between the officially reported consumption GDP and actual consumption GDP is just too large to be explained by it.

To understand the reason for the gap between official GDP which is under-reported and the actual GDP which is much larger, please read a recent paper by Kemal and Qasim presented at PSDE (Pak Society of Dev Economists) conference in Islamabad.

The paper goes into the details of the discrepancies between the Economic Survey GDP data and the Social and Living Standards (PSLM) consumption survey which is carried out and reported separately several months after the end of each fiscal year.

The PSLM data shows there's a huge gap between reported incomes and actual consumption in a largely cash-based economy.

Another issue the paper discusses is the rampant mis-invoicing of imports and exports that contributes to understating the official GDP.

For example, 2011-12 PSLM has not yet been completed.

http://www.pide.org.pk/psde/25/pdf/AGM28/M Ali Kemal and Ahmed Waqar Qasim.pdf

You make some good arguments too, but please note that merely reading the material posted does not imply agreement or even its accuracy.

I appreciate your views, and enjoy thinking about them. My critiques are not meant to be impolite, but I want to present a counter point to tone down some of the unbridled optimism that is often not on as robust a foundation as I would prefer. Reality is not always sunny. That is all.

 

[Just Jack]

Yes, I read this material the other time you posted it.

Here is an excellent article by Dr. Shakeel Ahmad elaborating on the same theme of excessive conspicuous consumption with falling domestic savings and collapsing total investment:

Institutions to invest | The Nation

Key points which he makes in the article:

I) National statistics are being fudged willy nilly.
II) There is a serious loss of credibility of government statistics since 2000.
III) Poverty & illiteracy levels are much higher than the massaged numbers indicate.
IV) Pakistan is now a laughing stock at international financial institutions
V) IMF/WB/UN are now questioning authenticity of Pakistani economic data
VI) Growth of last 10 years was not driven by higher investment
VII) The national savings rate fell from 15% in 2001 to 9% in 2011.
VIII) Vulnerability & dependence on external assistance (Aid/IMF) has increased
IX) Low savings and low investments have created a future poverty trap
X) Pakistan in now caught in a vicious circle of low investment, low growth, low productivity.
XI) China and India learned from their mistakes and are now standing on their own two-feet
XII) Pakistan, however, refuses to learn from its mistakes.

Shakeel Ahmad is a former member of the Civil Service of Pakistan.

 

[Just Jack]

Apparently, the Pakistani Economy is TWICE as large as officially believed. In addition, and by implication, Government Debt burden is only HALF as large as officially believed.

And YET:

Living in denial - Dr Ashfaque H Khan

Looming vulnerabilities | DAWN.COM

Dollar run - Dr Farrukh Saleem

Through the eye of the needle - S Iftikhar Murshed

Major balance of payments crisis expected by Dec - thenews.com.pk

Before the implosion - Dr Ashfaque H Khan

IMF sees SBP-held forex reserves falling to $7.5bn

Pakistan to repay $1.1 billion to IMF in Feb

Living from loan cheque to loan cheque: Govt scrambles for funds before next IMF repayment – The Express Tribune

It would be great if someone could inform the authors of all of the above-linked articles of the new findings of how big the Pakistani economy really is. Perhaps, due to their lack of access to education & information, these authors are unaware of all these new research findings that appear in some publication or blog somewhere?

 

[Just Jack]

You make some good arguments too, but please note that merely reading the material posted does not imply agreement or even its accuracy......
....... Reality is not always sunny. That is all.

Extract from your own quote of Dr. Ashfaque H. Khan: "....Domestic investment hit a 60 years low and domestic saving experienced an unprecedented fall. Side by side, foreign private investment collapsed...."

Clearly, if savings & investment are too busy falling, hitting 60-year lows or collapsing, then it is incumbent upon (conspicuous) consumption to grow massively in order to prevent GDP growth rates from going negative (recession). And this avoidance of a recession by excessive stimulation of consumption (Keynesianism) is directly linked to the massive & consistent fiscal (or budgetary) deficits of 7-9% currently being incurred by the Government.

Once again, every which way you look at it, the conclusion is the same: This is not sustainable. And it always ends in the same way: Financial Crisis, BOP crisis, Currency crisis, and finally Total Macroeconomic Collapse.

 

[xyxmt]

Whatever feel you better.....Sure KSA is bigger and better performer than BSE.......sweet
dreams

dont poop man, its just an article and its all bullshit, in reality Pakistan is doing even better than what he says in the article. Do you think we beg US for trade anymore, do you think US threatens Pakistan with sanction anymore...never...during last sanction Pakistan learned how to survive. Soon you will read books on mysterious Pakistani Economy...yar kadoon aao na vaikho tusi ve is mystery noon.

People hate PPP but in reality something PPP did would put Pakistan way up in near future, one thing for example they increased the support price of essential items. all the farmers are getting ****** rich now and even the laziest ones have working hard in the fields.

 

[Just Jack]

The PPP Government increased the support prices for essential items (i.e. food-prices) specifically to move purchasing power away from urban areas and towards their key voter base in the rural areas. Obviously, this has led to increased purchasing-power amongst farmers and other rural workers in Pakistan.

However, since this action does not create any additional wealth and only transfers purchasing power from one sector to another, it follows that any increase in the consumption in rural areas must, in general, be matched by a decrease in the consumption in urban areas.

The only reason overall (urban plus rural) or national consumption has increased is because rural incomes are aggregate-taxed at lower rates than urban incomes. Therefore, the real net increase in overall consumption came only because of a decrease in tax revenue.

Still further, since the PPP government did not cut spending in response to this falling tax revenue, but rather increased the budget deficit, it follows that it is this increase in the fiscal deficit that has financed the recent overall consumption boom.

Still further, given that any increase in fiscal deficit crowds out private investment, it follows that the current consumption boom must be cannibalizing future investment & growth.

Once again, the conclusions are exactly the same as I have posted many times before:
A) This is not sustainable.
B) Serious crises (Financial, Debt, Currency) are just around the corner. They could hit at any time now.
C) Without the reversal of current trends & policies, total macroeconomic collapse is the only possible future outcome.

I rest my case.

 

[VCheng]

..............
Once again, the conclusions are exactly the same as I have posted many times before:
A) This is not sustainable.
B) Serious crises (Financial, Debt, Currency) are just around the corner. They could hit at any time now.
C) Without the reversal of current trends & policies, total macroeconomic collapse is the only possible future outcome.

I rest my case.

I do agree with you on the first point that is very clear: The present economic path is NOT sustainable.

 

[Just Jack]

I do agree with you on the first point that is very clear: The present economic path is NOT sustainable.

Pakistan has dug itself into a hole, but the OP is denying the existence of that hole. Pakistan is digging itself deeper & deeper into that hole, and the OP is just encouraging Pakistan to dig faster. This is suicidal.

Following are more data that make the same point from different angles of looking at the economy.

Take a look at the latest GOP report (2012) on Manufacturing--
http://www.finance.gov.pk/survey/chapter_12/03-Manufacturing.pdf

In Table 3.1 on Page 39, we can see the following:

A) Growing Sectors:
1) Food & Beverages
2) Textiles
3) Leather
4) Pharmaceuticals
5) Packaging Materials

B) Collapsing Sectors:
1) Steel: -28.5%
2) Rubber: -24.6%
3) Engineering: -10.2%
4) Electronics: -7.9%
5) Petroleum: -5.7%
6) Chemicals: -4.7

Note that all the growing manufacturing sectors are primarily associated with direct household consumption. Also note that all the collapsing sectors are primarily associated with industrial investment.

The collapse in Engineering & Steel sectors is especially frightening because the debacle is so deep and so persistent.
---

Next, take a look at the latest GOP report (2012) on Investments--
http://www.finance.gov.pk/survey/chapter_12/01-GrowthAndStabilization.pdf

In Table I.8 in the APPENDIX at the end of the report, we can observe the following:

(1) From the peak in 2007, investments from all sources (Public-Private-General Government) are down significantly.

(2) Sector wise, however, it is interesting to see that only the following sectors are holding or improving on their 2007 peak investment levels:
(i) Agriculture
(ii) Small-scale Manufacturing
(iii) Wholesale & Retail
(iv) Dwellings/Housing
(v) General Services

(3) Investments in the following sectors, however, have collapsed since their peak in 2007:
(i) Mining
(ii) Large Scale Manufacturing
(iii) Plant construction
(iv) Electricity & gas
(v) Transport & Telecom
(vi) Finance & Insurance

Note that all the 5 sectors in which investments are holding or growing are once again associated with direct household consumption of food, beverage, clothing, shops, restaurants, malls, flats, massage parlors, golf courses et cetera. Conversely note that all the other sectors in which investments have collapsed are associated with core infrastructure industry areas.

SUMMARY: No matter how we look at it. No matter where we go. No matter how much we twist, bend or warp it, the essential fact remains the same-- The current consumption boom is coming at the cost of cannibalizing future growth. Pakistan is right now eating its seed-corn. There will not be much to harvest in the future. This dangerous road always winds through financial Crises, BOP crises, currency crises and eventually leads to but one destination: Total Macroeconomic Collapse.

Is there anybody out there? Is anyone listening? Pakistan must save & invest more. Pakistan must transform & restructure its economy completely. Pakistan must do it NOW!. There is no time to lose. Dr. Ishrat Ahmad and Dr. Ashfaque Khan have said this repeatedly; the only question is this: Is anybody in Islamabad listening?

 

[VCheng]

Pakistan has dug itself into a hole, but the OP is denying the existence of that hole. Pakistan is digging itself deeper & deeper into that hole, and the OP is just encouraging Pakistan to dig faster. This is suicidal...........................

You make some good points in bold, but I am sure the OP would like an opportunity to respond to that.

 

[Just Jack]

You make some good points in bold, but I am sure the OP would like an opportunity to respond to that.

There is no time to wait for responses. Pakistan has to restructure its economy NOW! Pakistan must immediately boost savings & investment. There is no time to be lost.

Even as mindless indulgence in conspicuous consumption is rising rapidly in Pakistan, here are some more horrific symptoms of the utter collapse of investments into the real underlying industrial base:

(1) Annual Truck production has collapsed from a peak of 5,000 in 2007 to meager 2,200 this year.
(2) Annual Bus production has collapsed from a peak of 1,200 in 2007 to a meager 500 this year.

Note that unlike passenger cars, which are counted as consumption in accounting, buses & trucks are counted as investment in the national accounting system. Here are the cold, hard data from the Pakistan Automotive Manufacturers Association (PAMA):

PAMA Statistics

Given that Pakistan Railways is a mess and carries less than 10% of freight & passenger traffic, it is the trucks and buses that are the real backbone of Pakistan's transportation industry. Clearly, the production data for this year show that the transportation industry's "backbone" is close to snapping.

Doesn't anybody find it strange that Pakistan, with a newly-uncovered massive ("formal" + "informal") Nominal GDP of over 400 Billion$ or a PPP GDP of over 1 Trillion$, only managed to produce a meager 500 Buses & 2,200 trucks this year?

Now Pakistan's eastern-neighbor, India, has a Nominal GDP of 1.5 Trillion$ and a PPP GDP of about 3.75 Trillion$. So its economy should presumably be about 3-4 times the size of Pakistan's newly-uncovered large GDP. Has anyone wondered how many buses, trucks and other vehicles India is producing? Here are all the current data-

Truck Production
Bus Production
Light Commercial Vehicle Production
Passenger Car Production

Item.............India........Pakistan.......Ind/Pak Ratio
Trucks.....325,000.........2,200.............150
Buses......50,000...........500................100
LCV..........513,000.........19,000...........27
Cars.........3,000,000......140,000.........22

What? What? The Indians are producing 150 times as many trucks and 100 times as many buses as Pakistan?

What are the "leaders" of Pakistan doing? Is everybody sleeping in Islamabad? Doesn't this wake anybody up? Or is everybody so busy with the current conspicuous consumption that nobody has any interest in the facts, data and details of the ailing industrial base that is collapsing around them right now? What is going on? Anybody?

 

[MST]

There is no time to wait for responses. Pakistan has to restructure its economy NOW! Pakistan must immediately boost savings & investment. There is no time to be lost.

Even as mindless indulgence in conspicuous consumption is rising rapidly in Pakistan, here are some more horrific symptoms of the utter collapse of investments into the real underlying industrial base:

(1) Annual Truck production has collapsed from a peak of 5,000 in 2007 to meager 2,200 this year.
(2) Annual Bus production has collapsed from a peak of 1,200 in 2007 to a meager 500 this year.

Note that unlike passenger cars, which are counted as consumption in accounting, buses & trucks are counted as investment in the national accounting system. Here are the cold, hard data from the Pakistan Automotive Manufacturers Association (PAMA):

PAMA Statistics

Given that Pakistan Railways is a mess and carries less than 10% of freight & passenger traffic, it is the trucks and buses that are the real backbone of Pakistan's transportation industry. Clearly, the production data for this year show that the transportation industry's "backbone" is close to snapping.

Doesn't anybody find it strange that Pakistan, with a newly-uncovered massive ("formal" + "informal") Nominal GDP of over 400 Billion$ or a PPP GDP of over 1 Trillion$, only managed to produce a meager 500 Buses & 2,200 trucks this year?

Now Pakistan's eastern-neighbor, India, has a Nominal GDP of 1.5 Trillion$ and a PPP GDP of about 3.75 Trillion$. So its economy should presumably be about 3-4 times the size of Pakistan's newly-uncovered large GDP. Has anyone wondered how many buses, trucks and other vehicles India is producing? Here are all the current data-

Truck Production
Bus Production
Light Commercial Vehicle Production
Passenger Car Production

Item.............India........Pakistan.......Ind/Pak Ratio
Trucks.....325,000.........2,200.............150
Buses......50,000...........500................100
LCV..........513,000.........19,000...........27
Cars.........3,000,000......140,000.........22

What? What? The Indians are producing 150 times as many trucks and 100 times as many buses as Pakistan?

What are the "leaders" of Pakistan doing? Is everybody sleeping in Islamabad? Doesn't this wake anybody up? Or is everybody so busy with the current conspicuous consumption that nobody has any interest in the facts, data and details of the ailing industrial base that is collapsing around them right now? What is going on? Anybody?

Thanks for your post. Its quite informative.
In this example unless you include the imported trucks and buses we will not know their complete impact on economy. A country may be importing most of these instead of manufacturing them as that will depend on the scale automotive industry.