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‘Macro adjustments to hurt economic growth’

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‘Macro adjustments to hurt economic growth’
Fayaz Hussain

Updated December 07, 2018

KARACHI: Pakistan’s economy is expected to undergo ‘macro adjustment’ in 2019 after going through one of the ‘strongest growth phases over the past five years’ which led to fiscal and current account deficits at above six per cent of the GDP, said EFG Hermes, the Middle Eastern financial research and brokerage firm, on Thursday.

The report warns that if the government “wants to avoid a sudden stop to the economy,” an International Monetary Fund (IMF) programme is “unavoidable”.

The adjustment is expected to come at the cost of economic growth which reached decade highs primarily “fuelled by a rare combination of accommodative monetary policy and fiscal policies, low inflation, low oil prices, and improved security.”

However, negotiations between the IMF and government have already gone sour over the pace of adjustment. The “IMF is looking for a more rapid approach to deal with the economy’s sizeable misalignment” whereas the government is looking for “a more extended implementation of macro adjustment to avoid inflicting financial pain on the public.”

In its estimates for GDP growth, EFG Hermes paints a bleak picture of Pakistan’s economy. The country’s nominal GDP is likely to shrink to $285 billion by 2020 from $313bn in 2018. Subsequently, GDP growth is expected to slow down to 3.8pc by 2020.

The publication also highlights that government’s steps to align the economy may “still fall short of setting the economy on a more sustainable path.” The government has already taken some hard-hitting measures such as increasing gas and electricity tariffs, devaluing the currency and raising interest rate by 250 basis points.

The Egypt-based firm sees “further devaluation of dollar-rupee (5-10pc), as well as interest rate hikes (100-150bps).” Rupee’s depreciation within a short span of time has resulted in a sharp spike in inflation with core inflation at its five-year high.

EFG Hermes also anticipates multiple risks for Pakistan’s economy in 2019 in the form of higher than expected deprecation, aggressive monetary tightening and lack of agreement over the pace of adjustment with the IMF.

Published in Dawn, December 7th, 2018

@Nilgiri @BHarwana @Śakra @SunilM @XiNiX @Mage @VCheng @Indus Pakistan
 
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Economy shrinking in dollar terms (45 Billion Dollars) can be a blessing in disguise. But that will require some heavylifting by Govt. Will have to see if IK has stomach to introduce those very painful reforms. His own allies may just turn on him if he does.
 
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Economy shrinking in dollar terms (45 Billion Dollars) can be a blessing in disguise. But that will require some heavylifting by Govt. Will have to see if IK has stomach to introduce those very painful reforms. His own allies may just turn on him if he does.
He is there because of the Militablishment. No political party can touch him.
 
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What a shitty analysis ... Who the hell quote nominal GDP and that too decreasing ... This guy must be out of mind that a country's economy with population growth of 2% + is going to shrink ... nuts
‘Macro adjustments to hurt economic growth’
Fayaz Hussain

Updated December 07, 2018

KARACHI: Pakistan’s economy is expected to undergo ‘macro adjustment’ in 2019 after going through one of the ‘strongest growth phases over the past five years’ which led to fiscal and current account deficits at above six per cent of the GDP, said EFG Hermes, the Middle Eastern financial research and brokerage firm, on Thursday.

The report warns that if the government “wants to avoid a sudden stop to the economy,” an International Monetary Fund (IMF) programme is “unavoidable”.

The adjustment is expected to come at the cost of economic growth which reached decade highs primarily “fuelled by a rare combination of accommodative monetary policy and fiscal policies, low inflation, low oil prices, and improved security.”

However, negotiations between the IMF and government have already gone sour over the pace of adjustment. The “IMF is looking for a more rapid approach to deal with the economy’s sizeable misalignment” whereas the government is looking for “a more extended implementation of macro adjustment to avoid inflicting financial pain on the public.”

In its estimates for GDP growth, EFG Hermes paints a bleak picture of Pakistan’s economy. The country’s nominal GDP is likely to shrink to $285 billion by 2020 from $313bn in 2018. Subsequently, GDP growth is expected to slow down to 3.8pc by 2020.

The publication also highlights that government’s steps to align the economy may “still fall short of setting the economy on a more sustainable path.” The government has already taken some hard-hitting measures such as increasing gas and electricity tariffs, devaluing the currency and raising interest rate by 250 basis points.

The Egypt-based firm sees “further devaluation of dollar-rupee (5-10pc), as well as interest rate hikes (100-150bps).” Rupee’s depreciation within a short span of time has resulted in a sharp spike in inflation with core inflation at its five-year high.

EFG Hermes also anticipates multiple risks for Pakistan’s economy in 2019 in the form of higher than expected deprecation, aggressive monetary tightening and lack of agreement over the pace of adjustment with the IMF.

Published in Dawn, December 7th, 2018

@Nilgiri @BHarwana @Śakra @SunilM @XiNiX @Mage @VCheng @Indus Pakistan
 
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What a shitty analysis ... Who the hell quote nominal GDP and that too decreasing ... This guy must be out of mind that a country's economy with population growth of 2% + is going to shrink ... nuts

EFG is a very renowned firm with good reputation.
 
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What a shitty analysis ... Who the hell quote nominal GDP and that too decreasing ... This guy must be out of mind that a country's economy with population growth of 2% + is going to shrink ... nuts

In nominal USD terms, yes the GDP will shrink with depreciation.

Nominal USD only has so much applicability though....it is important for foreign loans/ trade/investment etc....but PPP is lot more important for total physical consumption + social well being (since Pakistani public do not do their day to day stuff with USD, but with PKR).

Hopefully next few years will illustrate value of PPP over nominal to many Pakistani members here.
 
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This guy must be out of mind that a country's economy with population growth of 2% + is going to shrink ... nuts

This must be the "every child is born with enough food to feed him" belief at work. It doesn't really work like that in reality.
 
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Good news. Find the real value of RS

Yes...also it will give much better correlation with nominal (real) where inflation (which is correlated with depreciation) is taken into account.

You can see the discrepancy between the two here:

https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=PK

(GDP of 300+ billion USD in 2017)

https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?locations=PK

(GDP of 240 billion USD in 2017....once effective inflation vis-a-vis USD taken into account)

That is pretty serious discrepancy (some 25% i.e 60 billion dollars)

India in comparison has both figures roughly the same (2.6 trillion USD) because it didnt follow such hard peg strategy that PMLN did this long and allow such over-valuing in the nominal side (i.e basically a govt induced subsidy transfer, leverage wise from capital account to current account...when neither has anywhere near the intrinsic sustainable elasticity to handle that in the mid to long term)

I.K admin biggest reform (in current window) must be indeed to allow much more free float market forces....and reduce the unnecessary loan burden (which is really cost of not doing reform internally to improve the performance/elasticity of the main economic levers...just like its bad to have one's arteries harden/plasticize).

Its actually quite a scam that PMLN identifies on the "right" in economic/political spectrum...this was a huge effective subsidy allocation in effect (argument being a market failure in the forex/PKR interaction realm).

@VCheng @django @Zibago @Hell hound @Major Sam @Chinese-Dragon @Oscar @Chak Bamu @Indus Pakistan @Joe Shearer @hellfire @Chinese-Dragon @GeraltofRivia @That Guy
 
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Short-term pain, it's been put off by the past government. It will have to happen sooner or later. In the long run, all of this capex and investment in infrastructure, along with better economic oversight will pay off.

I was saying it long before that PKR will need to be devalued, rates will rise, the previous rate of nominal GDP growth will not be sustainable given that we were burning reserves to keep PKR overvalued, a baffling policy in my opinion.

In nominal USD terms, yes the GDP will shrink with depreciation.

Nominal USD only has so much applicability though....it is important for foreign loans/ trade/investment etc....but PPP is lot more important for total physical consumption + social well being (since Pakistani public do not do their day to day stuff with USD, but with PKR).

Hopefully next few years will illustrate value of PPP over nominal to many Pakistani members here.

A lot of people don't understand this different, most dollar-poor countries, developing countries or those countries like Iran have their economy severely underestimated in nominal terms, for countries like ours, PPP is the better measure.
 
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A lot of people don't understand this different, most dollar-poor countries, developing countries or those countries like Iran have their economy severely underestimated in nominal terms, for countries like ours, PPP is the better measure.

Yes to chart physical consumption/effective GDP/output etc....PPP cannot be beat really (that was the whole point why it was developed in the late 80s)....because of vastly different levels of integration/exposure with global economic/liquidity chains that are found among countries (in the developing world especially)...basically relative scarcity of reference (USD) liquidity in a system (compared to other systems) will cause same set of goods/products to be valued less in the pure nominal realm (even accounting for "quality" differences etc that lot of members have argued with me before before I pointed them to the ICP process).

Nominal does have its more relevant use when it comes to forex related matters and pressures though (after all such things don't care about why you have a systemic scarcity of the global reference many things are payable in). "PPP-dollar" is not legal tender or have a printing press in operation anywhere.

That's why it can be useful to look at USD (real) nominal that charts relative inflation between the source and local reference being compared. More or less you will find it correlates with PPP growth rate....of course the overall level mismatch will still be there given the integration/exposure issue I mention (which many people call the "black" economy but don't quite understand it per se....similar to dark matter conceptually when we talk about the best models of gravity we have right now). The more exposure/integration to the world free market eye's...the more can be explained and closer to 1:1 sync achieved. It takes time and needs reform, not short cut (political sentiment driven) fix.
 
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"The country’s nominal GDP is likely to shrink to $285 billion by 2020 from $313bn in 2018. Subsequently, GDP growth is expected to slow down to 3.8pc by 2020."


That is the main reason for switching to PPP based measurement of GDP
 
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