Stagflation looming

In a press briefing after the first of a few meetings on evolving a joint economic agenda, the Finance Minister stressed the need to highlight the silver linings in the economy, such as hopes of a surge in exports past $20 billion this year. Viewing the glass half full certainly is a positive omen.
Yet, a cursory review of the recently released LSM data paints a starkly different picture. In the first five months of the fiscal year, productivity has decreased 2.3 percent.
The OCAC index, representing the production of oil companies, is seen languishing by a contraction of more than 10.5 percent in the same period. largely burdened by the persistent circular debt
Trickle down effects on the MI index, which reflects Ministry of Industry, has been chopped down by 4.75 percent from July to November, caused by shortages of energy resources.
"LSM production at a three year low and persistent inflation make for a bumpy ride in the economy with little indication of growth in the current or next fiscal years." Hamza Marath at KASB Securities told BR Research.
In an earlier note released to investors on Wednesday, he warned clients of impending stagflation, which, in other words, means sustained periods of marginal growth coupled with inflationary pressures and a high level of unemployment.
Experts single out the burgeoning fiscal borrowing as the main culprit stoking inflation, "Ballooning government borrowing from commercial banks is crowding out the private sector with no let up in sight," said economist Ayub Mehar. It only takes 6-8 weeks for this to be reflected in inflation said Mehar.
The projected unemployment figures are 5.5 percent, according to the Economic Survey. The rosy picture is the result of an internationally accepted definition of unemployment that includes unpaid family workers, the quantum of which is huge, and largely undocumented, in Pakistan.
Moreover, majority of the labour force employed in production activities are contractual employees - many of whom work on daily wages. When factories are closed, for energy shortages for example, they are unemployed but not reflected in the data.
Tough economic realities have curtailed corporate earnings. The cost of doing business is increasing, revenue growth is not strong enough, and capacity utilisation across the board remains low, according to Sayem Ali, economist at Standard Chartered Bank.
Couple that with a decline in real incomes in the past and youve got the perfect recipe for marginal growth in the economy.
"Even if we assume the governments estimates of 2 percent growth this year, the economy demands 8 percent growth to remain sustainable given its population dynamics," says Mehar.
If the productive capacity at home is not enough to meet demand, imports are likely to rise putting pressure on the balance-of-payments. Worst case scenarios are being likened to the balance-of-payment crisis of 2008.
Hopes are pinned on the policymakers to agree on a reform agenda that is both actionable and implemented with integrity. Time is a luxury, not on offer anymore.