Where did all this Growth Come From?

Where did all this Growth Come From?
Pakistan’s economy is no less interesting than its politics. Whenever you begin to think that stability has returned and one can make predictions with certainty, the economy reacts rather erratically to disturb economic models. Economists had a rude awakening last week when the Pakistan Bureau of Statistics reported that the economy had expanded 3.94% in FY 2021 as opposed to World Bank’s growth projection of 1.3%. Embarrassingly enough for economists that had predicted a slower recovery, the economy had not only reported growth but it was comprehensive and holistic growth that was supported by positive output-growth indicators by all sectors of the economy. Agriculture grew 2.77%, which, while being a step down from 3.31% in the previous year, is greater than the average growth of the last five years. The six major crops outperformed production expectations that caused a late-year surge in the sector, which by the end of the second quarter of FY 2021 wasn’t on schedule to post growth in excess of 2%. The loss in the agriculture output growth from 3.31% to 2.77% was compensated by large windfall gains in the manufacturing and services sectors; most particularly manufacturing, that seemed to take even those in the know by a pleasant surprise.

Dr. Hafiz Pasha

The suppression caused by COVID had hit industry hardest amongst the three primary contributors to GDP; agriculture, industry and services. Within the industrial sector, in fact, LSM growth had been severely damaged due to closure of industries and travel restrictions that hampered the flow of exports. Industry had contracted 7.39% in FY 2020. From a crippling contraction, it made large excesses in FY 2021 to record unprecedented growth of 8.3%. The services sector also grew around 4.4% after contracting 0.55% in FY 2020. While agriculture and services did contribute to the growth rebound, it is important to put the industrial growth of 8.3% into perspective.
As surprising as it may come across, this growth has lent a new purpose and life to the political government that had begun to drown under fierce criticism from the opposition

Labour demand had remained subdued during COVID. It is a great likelihood that the expected wage rate had fallen during this time, allowing firms to, after the resumption of business activity, expand the size of their labour force and make use of the low-cost labour to enhance the level of their profitability. Secondly, with industrial closures and halting of the production process, excess investment and productive capacities were residing with industrial firms that, it is likely, would have begun to produce with greater returns to scale than prior to the incidence of the pandemic. Thirdly, what may have also played a crucial role in rebound in the industrial sector is the amount of assistance, subsidy and reforms (such as the ease of doing business) that brought about some increase in private investment and gross capital formation.

However, even after factoring in shifts in the industrial sector dynamics, economic projections released until two weeks prior to the release of the growth numbers by the Pakistan Bureau of Statistics did not foresee growth in excess of 2%.

The only plausible explanation for this spurt of growth, then, seems to be the sudden rise in remittances, especially from the Middle East and Gulf countries. Between July and April of the ongoing financial year, remittances were recorded at US $ 24.2 billion, which is more than half the entire investment of the China Pakistan Economic Corridor (CPEC) – that is oft-cited as the game-changer for Pakistan and is expected to make the investment promised under the deal in a period spread over 15 years. An injection to the tune of $ 24 billion in a single year in an economy of US $ 265 billion is not only substantial but enough to turn its fortunes around.

However, as we have continued to argue, this rebound and change in fortunes may prove to only temporary.

World Bank projections for FY 2021 had been more dismal than the
expansion recorded

As surprising as it may come across, this growth has lent a new purpose and life to the political government that had begun to drown under fierce criticism from the opposition that it is incompetent to keep the wheel of the economy moving. Whenever the opposition refers to the wheel of the economy, it implies growth in the GDP.

Development is a Third World issue and a Third World concept. However, its neglect is also a Third World phenomenon. Third World countries discuss development quite a bit, often at lengths not required to assist effective and timely implementation. However when it comes to designing and implementing projects, they can hardly look beyond growth in the GDP, which, while being a relevant and telling indicator, only builds a certain part of the narrative and reveals a certain, often distorted, part of the larger picture.

While one may disagree with the idea of relying on GDP growth to ascertain the health of an economy, what remains is that the policy change in the Ministry of Finance has begun to show results in its first two weeks. Remittances have grown, foreign exchange reserves are building and private investment has propelled industry to become the star contributor to growth. It is a win for the political government who would like to continue to ease up the economy further to chase higher levels of growth.

As the government continues to mount its celebrations, eminent macroeconomist Hafiz Pasha warns that since the reported growth numbers relate to a period that excludes the months in which havoc was caused by the third wave of COVID-19, therefore, when those months would be included in the models, this growth rate could be revised to something between 2% and 3%, thereby implying that the economy could grow by something around 4% in FY 2022. Whether that will happen depends on many things: amongst which remains the imperative that the construction industry is supported and the expansionary fiscal policy that the government has now begun to follow continues into FY 2022.

The writer is an economist and ex-Director of the Burki Institute of Public Policy (BIPP).

He tweets @AsadAijaz