Red zone economy | By Farrukh Saleem

873

Red zone economy


Four months ago, Ipsos, the French multinational market research firm, conducted a ‘consumer confidence survey’ in Pakistan.

The survey found that “75 percent of Pakistanis see inflation and 70 percent unemployment as the biggest issues…” The survey also discovered that “86 percent were not confident about their job security; 53 percent believe poverty was the most worrying thing; 38 percent increase in electricity rates; 36 percent said ever-increasing taxes were the biggest issue.”

For Pakistani consumers the biggest issues are all economic in nature-inflation, unemployment, job security, poverty, electricity rates and the ever-increasing taxes. For Pakistani decision makers the biggest issues are TV talk-shows, Facebook, Twitter, TikTok, Instagram, YouTube and WhatsApp.

In South Asia, Pakistan has the highest rate of inflation. Generally, there are two types of inflation: cost-push and demand-pull.

Cost-push inflation is when prices are ‘pushed up’ as a result of an increase in the cost of inputs like electricity, petrol, diesel and natural gas. Demand-pull inflation is when prices are ‘pulled up’ as a consequence of too much money chasing too few goods.

Clearly, inflation in Pakistan is the cost-push type. But who is pushing up the cost of inputs-electricity, petrol, diesel and natural gas? Then there’s the rupee falling like ninepins.

In August 2018, when the PTI formed the government, a dollar was worth Rs123. The rupee has since fallen to Rs173, losing 40 percent of its value in 37 months. That’s an average of more than 1 percent a month, every month.

Here’s a brief list of what we import: wheat, sugar, lentils, tea, chilies, petrol, diesel, cotton, fertiliser, machinery, iron, steel and paperboard. When the rupee falls like ninepins the price of all these items go through the roof. So we have cost-push inflation plus a rupee falling like ninepins.

That’s a red zone economy-a high rate of inflation in-tandem with high unemployment (in economics it is called ‘stagflation’).

That’s a red zone economy-inflation means poverty; poverty leaves people hungry; hunger means pain and crime. That’s the vicious cycle we are in. The good news is that we have the potential to break this vicious cycle.

In 1970, Pakistan’s GDP grew by 11.3 percent-the highest in South Asia (General Agha Mohammad Yahya Khan from 25 March 1969 to 20 December 1971). In 1980, Pakistan’s GDP grew by 10 percent-the highest in South Asia (General Mohammad Zia-ul-Haq from 16 September 1978 to 17 August 1988). We have done it before we can do it again.

For Pakistani consumers the biggest issues are all economic in nature-inflation, unemployment, job security, poverty, electricity rates and the ever-increasing taxes. For Pakistani economists our external sector is now heading towards the red zone.

As per the most recent figures released by the Pakistan Bureau of Statistics (PBS), Pakistan’s trade deficit for the first quarter of the current fiscal year jumped to $11.7 billion-a 100 percent increase from the same period last year.

Alarm bells must ring-must ring loud. The State Bank of Pakistan (SBP) had projected a fiscal year-end imports of $61 billion; imports may actually exceed $70 billion.

The government had projected a fiscal year-end trade deficit of $28 billion; the trade deficit may end up exceeding $40 billion. The only good news here is remittances projected at around $31 billion-and this is the only saving grace. Almost all other government targets are off-way off.

This means another vicious cycle: current account deficit goes up, pressure on the rupee increases and we get even more ‘imported inflation’. This cycle also needs to be broken.

The SBP, in its attempt to break the vicious cycle, has imposed a 100 percent cash margin on 525 items. The same has been done in the past with only a marginal improvement in the trade deficit.

As a matter of record a large portion of our imports are price inelastic (meaning: an increase or a decrease in price have a marginal impact on the quantity imported).

In my opinion, any attempt to bridge the import-export gap must focus on increasing exports rather than just imposing 100 percent cash margins on a number of import items.

Increasing exports means producing globally competitive exportable surplus. And that means competitively priced inputs-electricity, petrol, diesel and natural gas.

In effect, back to square one. We need to break not one but two vicious cycles-the inflationary spiral and the ballooning trade gap.

There’s no way out but wholesale reforms-the government should govern and not get involved in business ventures or the fixing of prices or trying to sustain the support price mechanism (wheat, sugar and cotton).

In order for the economy to get out of the red zone we need to reform the electricity sector, the public sector enterprises, reform FBR, reform the civil service, the judiciary and the police.

If we don’t reform this is what the outside world would say: “You are entering the Red Zone. Proceed at Own Risk. When in Doubt Run.”

Previous articleSh Rashid, Buzdar discuss political situation, uplift projects
Next articlePakistan kick-off T20 World Cup preparations from Sunday