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Thread-WHAT EXPLAINS THE SHOCKING FALL IN GDP GROWTH?SOME THOUGHTS AND CONSIDERATIONS The announcement of real GDP at 0.29% for this FY set off a tweet storm on the issue. Majority of the commentary,as usual,had little to do with the matter, the issues involved what happened 1/n
to perpetuate such a precipitous fall in GDP from expected 5% at the start of the FY to 0.29%, etc. I’ll try to cut through the clutter, to understand the nuances involved, including aspects hitherto undiscussed. First and foremost, there’s good evidence that the figures are 2/n
fudged. @rogueonomist has good commentary on it here thenews.com.pk/print/1073998-… But my conviction of fudging has more to do with the history of Dar!For those who are recent followers, please read my thread on him
https://twitter.com/ShahidMohmand79/status/1604398930460135425which details his shenanigans since 1998 3/n
Its not that others don’t indulge in fudging figures,but this guy takes it to another level. So I am not even a wee bit surprised. Also, the way the meeting at Planning was conducted raised alarm bells.Well Ok, now onto some of the more intellectual and interesting aspects of 4/n
this debate.That there was a substantial decline in GDP growth rate was expected, although the size of decline remained a matter of debate (and still is).One would be hard pressed to find a time in Pakistan’s history whereby 2 colossal shocks hit the country (little time b/w 5/n
them).The first was external:Russo-Ukraine war which sent commodity and other prices through the roof.With a world still coming to grips with the losses inflicted by COVID-19 (especially disruption of value chains),the war was the last thing global economy wanted.For countries6/n
like Pakistan, already mired in external payment difficulties (when was the time we never were?)and whose economies are critically import dependent, this was straight from hell! Resultantly, Govt. had to put up some of the most stringent import controls ever to stave off a 7/n
spiraling payment crisis that could have seen the country default.Given the structure of the economy, increase in Pakistan’s GDP growth always invites an external payment deficit (like 6% GDP growth of PTI and PML-N did).Following this,there shouldn’t be any surprise that GDP 8/n
will go down as imports are curbed (which is what happened)!But the payment issues took a turn for the worst as $ prices of everything skyrocketed due to war,the budgetary calculations of external payments went south,and additional burden of payments became impossible to meet 9/n
through existing resources. Anyways, as we avoided a default and a modicum of normalcy returned, in came Pakistan’s worst floods, sending another enormous shock reverberating through the economy. Both these shocks worked through the supply and demand side. Severe curtailment 10/n
Severe curtailment of imports led to supply dearth in many sectors, raising prices of goods substantially. The floods devastated the supply of many commodities plus services. Rising prices, through higher tariffs and import compression led to inflationary pressures that were 11/n
further exacerbated by floods and domestic policies. A high inflationary environment led to demand compression/destruction. All these led to lower GDP. Of course, there are other factors that are to be considered in this whole scenario. Continued currency devaluation, due to 12/n
factors like ample political uncertainty, not only resulted in more inflation but also undermined Pakistan in other ways. E.g, pace of forex inflow into NPCs saw a noticeable decline. Calculations suggest that if the flow had maintained its course, we’d have around $2 bil 13/n
more.Not only that, but uncertainty leads to lower output in other ways too. For e.g, investors (domestic and foreign) put off their plans till situation improves. Right,now that I’ve briefly discussed the factors that led to low GDP,we need to move onto some important points14/n
of this debate.And I unabashedly confess to my lack of expertise on some of these, so maybe someone will help out!1-Setting aside the fudging issue for the moment, this estimate is based on 9 month (3 quarter) data.Maybe we’ll see a bit of jump in the number at the end of FY 15/n
b/c the last 3 months are traditionally the time when most of the public expenses (consumption and PSDP investment) are incurred, raising output.2-A very important aspect that is entirely missed in this debate is the size of informal economy,which the most reliable estimates 16/n
suggest to be at least 35% of the formal economy!From Karachi to Peshawar,markets are flooded with cheap, smuggled goods (mostly Iranian). Iranian diesel and oil smuggling has increased tremendously, and so has the market for $s, medicines and other goods.Put another way, in 17/n
adverse circumstances like present one,informal economy expands as formal’s pace of growth slows down.For an economy whose 35% or more chunk is informal,its undesirable not to make an estimate of what’s going on in that part,one reason being that it may overstate the economic18/n
difficulties to some extent.3- Reporter Shahbaz Rana claims that economy ‘shrank’ by $34 bil tribune.com.pk/story/2418706/… did the economy ‘shrank’ when the GDP growth is still in +ve territory? Even if GDP rate was -0.5%, $34 bil would still be a questionable figure.Also, what’s 19/n
quoting these figures in $s? Here’s a reason to ponder:on 9th May, as political violence ensued, $ got near to 300 in exchange markets, but within two days, came back to Rs.287 mark. What are we supposed to make of this, that Pakistan lost some chunk of GDP in a day, but 20/n
recouped it within 2 days? Does it sound logical? Just asking.. Anyways, I hope you liked the thread, in which I tried to simplify a very technical topic #PakistanEconomicCrisis #Pakistan @nadeemhaque @durre_nayab_ @saddameconomist @Sajidaminjaved @motasim @Speedman2016
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