What's new

Economy in recovery phase

Zarvan

ELITE MEMBER
Apr 28, 2011
51,754
84
58,475
Country
Pakistan
Location
Pakistan


LAHORE:
Signs of recovery are gradually appearing. Exports grew around 18% in dollar value while imports rose around 26%.
The imports outpacing exports resulted in a ballooning trade deficit of $31 billion. This is usual recovery story in a developing economy where imports normally exceed exports.

Bourgeoning remittances of $29.4 billion played a major role in bridging the trade gap in FY21. However, debt servicing requirements were fulfilled through multilateral financing and commercial borrowing fetched through Eurobonds and Sukuk.

Both exports and imports went down in FY19 and FY20. In those years, the government pursued a macroeconomic stabilisation path, which slowed the economy down.

The curtailment of imports depends on the pace of macroeconomic adjustment. If the pace of adjustment is fast, imports will be scaled back in a short span of time. This will, in turn, reduce exports since they also depend on imports.

The adjustment brought the economy to a level where imports decreased drastically while exports fell slightly.

Earlier, the current account deficit (CAD) reduced a great deal and it gradually helped in bolstering the foreign exchange reserves of the State Bank of Pakistan (SBP) above $18.2 billion.

The advent of Covid-19 along with an extended lockdown in FY20 provided an opportunity to policymakers to slow down the adjustment process. The accommodating monetary policy along with a tax amnesty scheme given to the construction sector propelled the current recovery.

The policy rate has been kept at 7% in order to give a boost to the industrial sector. Similarly, the tax amnesty scheme has brought boom to the realty sector.

As a result, real estate prices have increased a lot in many parts of big cities. Along with the elevated real estate prices, there was a mushroom growth in new housing societies last year.

Critics are of the view that the current real estate expansion will create environmental and ecological problems in the years to come. They further state that horizontal expansion of cities has destroyed a significant portion of green area, which has already affected agriculture production.

The current expansion will increase the land stock, which will remain unpopulated for a long period of time. On this basis, the current expansion would turn out to be counterproductive in the long run.

Despite these odds, the current recovery is propelled by the construction sector. Construction activity has increased across Pakistan as consumption of cement has gone up around 18%.

Similarly, steel consumption has also increased. The high demand for steel and cement has slightly jacked up their prices.
In addition, glass, ceramics, paints and other construction-related industries have got a boost.

The higher real estate prices significantly impact sales of automobiles. The worthy individuals use their capital gains to buy high-end cars. Hence, the higher real estate prices have become a contributing factor in the surge in car sales.

The government intends to sustain this recovery through a lax fiscal policy where expenditures will increase along with a nominal increase in taxes. This policy will increase imports, which have crossed $6 billion in June 2021.

The higher imports will increase CAD and put pressure on the foreign exchange reserves. If the government does not eat up the reserves, the pressure will fall on the rupee in the form of gradual depreciation.

In short, the economy is passing through a recovery phase. The boons of this recovery are still limited to a certain segment of the population.

Under the emerging situation, imports will surpass exports by a huge margin and the balance of payments will come under strain in due course. Hence, the current recovery will likely follow the old course.

The writer is the Assistant Professor of Economics at SDSB, Lahore University of Management Sciences (LUMS)


Published in The Express Tribune, July 19th, 2021.
Like
Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.

Economy in recovery phase (tribune.com.pk)
 

Desprado

FULL MEMBER

New Recruit

Jun 30, 2018
85
0
83
Country
Pakistan
Location
Pakistan
When a currency devalues to 1.5 rupee or around 1% value against dollar in a single day, cannot counter volatility or speculations than something is really wrong. The sole purpose of the Reserve of any number is to stop speculations and high volatility this the reason why any country maintain reserve if the purpose the killed than whole purpose maintaining the reserve is gone. When you do not counter basics than what will happen

If they are doing basics than what is the purpose of hiring 3 governor SBP?

1) People will buy from the exchange due to Panic

2) Investors will lose trust in PKR due to extreme Volatility

3) Inflation will be confirm in double digit.

4) Less FDI due to investor will trust PKR

5) Less deposit in the commercial banks

6) Less secondary investment.
 

Zibago

ELITE MEMBER
Feb 21, 2012
35,327
10
56,558
Country
Pakistan
Location
Pakistan
When a currency devalues to 1.5 rupee or around 1% value against dollar in a single day, cannot counter volatility or speculations than something is really wrong. The sole purpose of the Reserve of any number is to stop speculations and high volatility this the reason why any country maintain reserve if the purpose the killed than whole purpose maintaining the reserve is gone. When you do not counter basics than what will happen

If they are doing basics than what is the purpose of hiring 3 governor SBP?

1) People will buy from the exchange due to Panic

2) Investors will lose trust in PKR due to extreme Volatility

3) Inflation will be confirm in double digit.

4) Less FDI due to investor will trust PKR

5) Less deposit in the commercial banks

6) Less secondary investment.
A better option is to spend precious dollars on keeping the Rs pegged at an arbitrary number, subsidize imports and end up like Lebanon
 

ali_raza

SENIOR MEMBER
Mar 25, 2010
3,711
-2
3,191
A better option is to spend precious dollars on keeping the Rs pegged at an arbitrary number, subsidize imports and end up like Lebanon
or have a deal with uncle sam.
he will jack up the ruppe price liek it did in musharraf times keeping it stable at 60 for 10 years
or actually start making value added things the world could buy from u and start getting in club of stable countries
agrarian society’s don’t usually prosper in long run
industrialization is the key word here
rather then spending land for housing societies use the land to creat factories which creat things that can be sold to the world
government here is sleeping as usual
there is no one questioning the rise of housing societies cancer
no culture of apparment buildings is making it worse.
u cant have it both ways
one has to start from somewhere
either be a client to a big power and enjoy while it last
or start working like germany and japan or east asians did.
cant be luxurious and poor at the same time
Dumbos from Lahore think cheap Nutella is the Hallmark of a strong economy
its much worse then that
 

VCheng

ELITE MEMBER
Sep 29, 2010
40,798
55
34,749
Country
Pakistan
Location
United States
Signs of recovery are gradually appearing. Exports grew around 18% in dollar value while imports rose around 26%.
The imports outpacing exports resulted in a ballooning trade deficit of $31 billion. This is usual recovery story in a developing economy where imports normally exceed exports.
So what good is a recovery that results in an even more adverse balance of payments?
 

Bilal.

SENIOR MEMBER
Aug 9, 2013
4,667
9
6,319
So what good is a recovery that results in an even more adverse balance of payments?
Balance of payment is not worse. Trade deficit is only a component of it. Overall CAD has come down to a very manageable 0.6% of GDP.
 

VCheng

ELITE MEMBER
Sep 29, 2010
40,798
55
34,749
Country
Pakistan
Location
United States
Balance of payment is not worse. Trade deficit is only a component of it. Overall CAD has come down to a very manageable 0.6% of GDP.
Silly me, if exports increase, and the imports increase even more, it must mean the balance of payments is getting better. Pretty simple math, I suppose.
 

Bilal.

SENIOR MEMBER
Aug 9, 2013
4,667
9
6,319
Silly me, if exports increase, and the imports increase even more, it must mean the balance of payments is getting better. Pretty simple math, I suppose.
Not silly. But quite conveniently not looking at CAD. Bottom line is that CAD has improved consistently over the past 3 years.
 

Users Who Are Viewing This Thread (Total: 1, Members: 0, Guests: 1)


Top Bottom