Economy had plummeted during the peak period of the spread of COVID-19 from March 2020 to June 2020. Thereafter, there has been a process of it revival of economy. The basic question is how far has the economy recovered? What are the recent magnitudes of key macroeconomic variables as compared to the level prior to the outbreak of the pandemic?
The methodology adopted is to compare the magnitude of a macroeconomic variable in three periods, viz., July 2019 to February 2020, March 2020 to June 2020 and July 2020 to October 2020. This will enable quantification of the trend prior to COVID-19, the size of the fall and the progress thereafter.
The first variable analysed is the level of the GDP at constant prices of 2005-06 in the three periods. The year, 2018-19, had closed with the economy showing a growth rate of 1.9 percent, a significant decline from the growth rate of 5.5 percent in 2017-18.
The initial indications for 2019-20 were negative. The large-scale manufacturing sector was showing negative growth, exports were falling and the output from the Kharif crops, especially cotton and sugarcane, was disappointing. It was unlikely that the growth rate was going to be more than the previous year. In fact, it was probably closer to 1.5 percent.
The preliminary estimate by the Pakistan Bureau of Statistics (PBS) of the GDP growth rate for the full year of 2019-20 is negative 0.4 percent. It turns out that on the basis of more recent evidence that this growth rate greatly understates the fall in the GDP.
A revised estimate implies that the GDP fell by almost 2.5 percent in 2019-20. PBS had substantially overstated the growth rate of value-added in many sectors, including major crops, manufacturing, construction, electricity and gas, wholesale and retail trade, transport and communications and private services.
Based on the annual growth rate of negative 2.5 percent and the growth rate in the first eight months of 1.5 percent, the derived estimate for the period, March to June of 2019-20, is a big negative 10.5 percent. Therefore, there was a sizeable negative impact of COVID-19 on economic activity.
Various projections have been made of the likely GDP growth rate in 2020-21, ranging from a low of 0.5 percent by the World Bank to a high by the SBP and the Asian Development Bank of 2 percent. Currently, there are mixed signals. There has been a significant recovery in the output of the large-scale manufacturing sector of almost 5 percent in the first quarter of 2020-21. However, there has been a big failure of the cotton crop as indicated by the level of arrivals and exports continue to fall. As such, the GDP growth rate is unlikely to exceed 1 percent in 2020-21. In effect, the level of the GDP in 2020-21 is likely to be less than 0.5 percent higher than the level three years ago in 2017-18. The real per capita income will be lower by almost 6 percent. Such a fall has never been witnessed before in the economic history of Pakistan.
Turning to the trend in the level of investment, this is consistent with the above finding of a big slowdown in economic activity since February 2020. The PBS estimates are that private investment has fallen by close to 1 percent in 2019-20, while public investment has apparently risen by almost 2 percent.
Imports of machinery have been used as a proxy indicator of the level of investment in the economy. There appears to have been a persistent decline in imports of machinery. The first eight months of 2019-20, prior to COVID-19, saw a fall of 5 percent. During the period, March to June 2020, when the economy was disrupted by COVID-19, the level of imports of machinery fell by as much as 16 percent. This slump in investment has unfortunately continued and in the first four months of 2020-21 machinery imports have fallen by 14 percent in relation to the level in the corresponding period of 2019-20. This does not auger well for the future growth performance of economy.
The next key indicator of the performance of economy is the trend in exports. Fortunately, there was a positive growth in exports in the first eight months of 2019-20 of 3 percent. Exports slumped after the COVID-19 impact on Pakistan's export markets in the US, UK and the EU. There was a huge fall in exports of 26 percent during the peak period of COVID-19 from March to June 2020. Exports continued to fall thereafter. They have fallen by 10 percent from July to October 2020.
Fortunately, imports have also plunged downwards. They fell by 17 percent in the first eight months of 2019-20 by 20 percent in the last four months of 2019-20 and by 4 percent in the first four months of 2020-21. This has been facilitated by a drop in international prices, especially of oil. Consequently, the trade deficit has remained under control.
Finally, there is some good news. This relates to trends in construction activity, remittances and the rate of inflation. The level of construction activity is proxied by the domestic consumption of cement. There was inevitably a plunge during the period of COVID-19 spread and the sales of cement dipped by 8 percent. But there has been a strong recovery since then of 21 percent. This is attributable to the numerous fiscal and other incentives provided by the Government from March 20 onwards to the sector.
The big silver lining to the economy cloud is the continued phenomenal growth in the inflow of home remittances, despite negative projections by the World Bank and the International Labour Organization (ILO) of a big fall due to returning workers, especially from the Middle East. In fact, home remittance is perhaps the only variable which sustained positive growth even during the peak period of the impact of COVID-19. Between March and June, there was a growth of 7 percent. Since then the growth rate has spiraled up to 27 percent in the first five months of 2020-21. This is an unexpected bonus and has contributed to a positive current account surplus after a long time. Thanks once again to our expatriate workers.
Finally, there is the good news about the rate of inflation. It had risen to double-digit rates of almost 15 percent in the first eight months of 2019-20, with the lead taken by food prices. During the four months thereafter, it fell to an average of under 9 percent and continues to be so in the first five months of 2020-21. Clearly, the slowdown in economic activity reduced overall demand pressures and globally there was fall in prices of imports by Pakistan of oil and petroleum products, textile inputs, pulses, fertilizer, iron and steel, etc.
Overall, the country's economy is gradually emerging from the deep recession caused by the hard stabilization process earlier and more recently by the impact on economic activity by COVID-19. Unfortunately, the government does not have the fiscal space to stimulate further the pace of economic activity. People have had to live with falling real per capita incomes three years running. Inevitably, this has meant higher unemployment and incidence of poverty.
(The writer is Professor Emeritus at BNU and former Federal Minister).
Copyright Business Recorder, 2020
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