EDITORIAL: Prime Minister Imran Khan was reportedly briefed by his economic team that in spite of the continuing onslaught of Covid-19 economic indicators are positive particularly exports which have risen by 13.5 percent and remittances that have shown a consistent rise during recent months defying previous projections of a levelling off followed by a decline in remittances due to lay-offs of migrant workers in the Middle East. These two components of the current account have contributed to its surplus. This is not the time for complacency but a time for lessons learned.
The data released by the Pakistan Bureau of Statistics reveals that exports July-April 2020-21 reached a high of 20.8 billion dollars against 18.3 billion dollars in 2019-20. What does it mean? The highly contractionary monetary policies effective from May 2019 to March 2020 - a high discount rate and rapid rupee depreciation - were major factors in the containment of domestic productivity and exports while rendering imports unattractive thereby bringing down the 20 billion dollar current account deficit to a sustainable level; the high price paid by the public in containing the current account deficit cost the Khan administration a goodly portion of his political capital. In other words, a valuable lesson learned is to implement contractionary monetary policies judiciously that may be defined as raising the discount rate by an amount that would not only be linked to core inflation (whose components are sensitive to a rate adjustment) but also determine what rate would simply be too high for a productive unit to opt to borrow.
The data for July-April 2018-19 notes exports were 19.1 billion dollars (prior to the implementation of contractionary policies effective May 2019) while the comparable figure for 2020-21 is 20.8 billion dollars – a rise of 8.7 percent. However, imports in July-April 2020-21 were of 44.7 billion dollars against 38 billion dollars in 2019-20 and 49.4 billion dollars in 2018-19 – a rise of 17.5 percent this year in comparison to the year before and a decline of 1.68 percent between this year and 2018-19 before the implementation of contractionary policies. Thus in this context, the lesson learned is that while the contractionary monetary policies contained imports by stifling economic activity yet the situation quickly reversed itself with the easing of these policies. This further brings home the fact that the impact on imports of these policies was extremely limited and care must be taken in future not to follow suit.
Remittances in April 2021 were of 2.8 billion dollars – 56 percent higher than in April 2020 and grew by 29 percent July-April 2021 compared to the comparable period of the year before mainly sourced to Saudi Arabia (6.4 billion dollars), the UAE (5.1 billion dollars), the UK (3.3 billion dollars) and the US (2.2 billion dollars). State Bank of Pakistan (SBP) has given credit to the government and to its own proactive policies to encourage inflows through more formal channels while acknowledging that curtailed cross-border travel in the face of Covid-19, altruistic transfers to Pakistan amid the pandemic, orderly foreign exchange market conditions and, more recently, Eid-related inflows have contributed to record levels of remittances. With respect to SBP’s claim of orderly foreign exchange market conditions there is a perception amongst independent economists shared by the IMF that the SBP may have engaged in interventions to prop up the rupee in recent months. There is, however, a growing perception that remittance inflows may have maxed out and are not likely to rise any further.
The Prime Minister must also be wary of independent research that shows 1.5 percent growth in calendar year 2020 (January-December) released by the Lahore School of Economics which implies that the projection of around 3 percent growth for the fiscal year (July-June) by SBP and the Ministry of Finance may be too optimistic. The International Monetary Fund (IMF) has projected a growth rate for the current year at 1.5 percent and World Bank at 1.3 percent though these estimates may be on the back of the government continuing to implement the Fund programme conditions which the newly-appointed finance minister Shaukat Tarin has indicated are not economically viable due the pandemic third wave afflicting the country.
We would, therefore, caution that this is not the time for complacency and would urge that the government scales down expectations of a dramatic U-turn in the performance of key macroeconomic indicators, which typically take a couple of years of sustained policy decisions to turn around.
Copyright Business Recorder, 2021
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