LAHORE: Pakistan’s economic performance after the pandemic appeared to be better than that of its regional competitors, as the country’s GDP had already shrunk by 15% before the pandemic. The demand accumulated after the containment created economic activity.
The central bank has also provided unusual support in the form of low-interest loans to companies for the payment of their employees’ salaries. The loan service was also deferred there. Electricity and gas tariffs have been suspended and interest rates have been reduced from 13.25% to 7%, although inflation is still above 9%. The government was able to provide that support because it got a lot of international support. A moratorium has been announced on our foreign loans for one year. The International Monetary Fund stepped in with low-margin support of $ 1.3 billion. The World Bank and Asian Development have provided billions of additional dollars in the form of long-term loans.
The honeymoon period is now over. Pakistan should now service its foreign loans as normal. Foreign funding would not be as generous as in the past. The IMF has not released the second and third tranches of its $ 6 billion facility. It will be difficult to renew our short-term loans contracted with certain Gulf countries for foreign exchange support. Our competing economies have been a bit late in opening their economies, but now they are all set to challenge us in global markets. India and Bangladesh have seen their exports increase, although they remain below the pre-COVID-19 level.
Things would not go as well for our exporters as they were in July. The drop in exports in August should be a revelation for our economic managers. In July, we saw the unit prices of our major export items increase because there was no competition. This is the reason why exports were higher in value than in quantity. Prices will drop as more competitors enter.
Energy is the biggest villain in our economy. The entire system, from production to distribution and collection of invoices, is mired in corruption. Embezzlement has increased in this sector since the inauguration of the PTI government. We do not understand where the 40 per cent increase in the electricity tariff has gone. We are adding more circular debt than before. The tariff for the five favored export sectors has also been increased by around Rs3 / unit.
However, these exporting sectors would still get cheaper electricity Rs4 / unit than other exporters and domestic industry. It remains to be seen how the main exporting industry will cope with this tariff increase. In July and August, spinners were in the driver’s seat, although their exports declined. The domestic value-added sectors (bedwear and clothing) consumed most of the yarn produced in the country.
It should be noted that during this period, the rate of yarn in the local market was higher than its export price. The value-added sectors offered higher yarn prices because their own unit price also increased. Now that the world is back to normal, unit prices will go down, as will the prices of yarns. The next three months would be a test period for our textile industry. It will have to improve its efficiency to remain competitive.
Now, the time of servicing loans taken out for the payment of wages is also approaching and the moratorium on loans taken out by industries would also be ended. Loan servicing would become a problem for most of them. The wages they were paying with loans without any productive work would start to hurt them when they started repaying those loans. The unstable rupee would be another concern for them.
The absence of clearly defined long-term sector policies would hamper their investment plans. The government is woefully slow to formulate prudent industrial policies, and the bureaucracy is notoriously shrouded in red tape to ensure compliance.
Domestic demand has been severely shaken by the pandemic and the abnormal rise in prices. The unemployment rate is still very high. Some workers can join their former employers, but not all would be accommodated. Incomes have not increased at any level, be it senior managers or a modest worker.
However, the price of anything salable has increased dramatically in the 15-50% range. This put pressure on the purses of all employees, large and small. For the poor, buying food would be their only priority and they would not end up with consumable surpluses. For senior executives, there won’t be a lot of options for purchasing luxury items.