NationalVOLUME 15 ISSUE # 08

An economy in recession mode

The government is painting a rosy picture of the economy. In support of its contention it cites the fact that the current account deficit has shrunk, with imports going down by 18 percent. But according to experts, the current account deficit decline and decrease in imports show that the economy is shrinking.

According to latest reports, large-scale manufacturing output shrank for the fifth month in a row. The LSM index declined by 7.06 percent compared to a year ago. The LSM dip was caused by a decrease of 14 percent in petroleum products, 12.82 percent in the automobile sector, 9.9 percent in fertiliser, 9.81 percent in pharmaceuticals and 5.10 percent in iron and steel.

Further, during the current fiscal FY 20, private sector credit was negative Rs 84.6 billion compared to net borrowing of Rs 31 billion last year. On the other hand, members of the Pakistan Association of Automobile Part and Accessories Manufacturing (PAAPAM) have laid off over 4,000 employees and another 1,500-2,000 firms have been hit hard. All these are indications of an economic slowdown.

Needless to say, the economy is in serious trouble, but the government is not concerned that we are heading toward a disaster. In this connection, it needs to be mentioned here that the IMF merely acts as a recovery agency and is least concerned whether the economy is growing or not. News reports show that the impact of IMF measure is most noticeable in the construction sector as demand for housing has moderated amid rising building materials’ prices and higher costs of financing.

Let us not forget that the IMF has a failed history of making economic recovery in many parts of the world. In fact, through its harsh actions, it has made many countries economically bankrupt. In our case a major indicator is the government revenue which decreased from Rs 1.47 trillion to 1.28 trillion in the first four months of the current year and fell again in October 2019 from Rs. 376 billion to Rs 320 billion.

In the overall context, it is foolish to crow over a decrease in imports because it indicates shrinkage in economic activities. The reason for the decline in imports has been the depressed (27 percent) demand for automobiles valued at $261 million in the first quarter of the current fiscal year. Heavy vehicle imports also dropped by $67 million. Overall car sales plunged by 44 percent compared to the same period last year. Curtailing the import of vehicle parts has led to job losses and plummeting auto sales, resulting in lower revenue for the government and higher prices for goods.

Anyone can control the current account deficit by shutting down the economy. This will push the country to go into depression causing prices to rise, revenue collection to drop, and the government deficit and unemployment to soar.

As is widely known, figures released by government agencies are not reliable. So, we don’t know the actual state of affairs. Most developed countries publish monthly data on inflation, unemployment, GDP, and other economic indicators. But this is not the case here as a result of which the public is unaware of government actions and their effect on the people and the economy.

Many economic indicators are available to help signal future economic outlook, such as the yield curve, confidence indexes, employment data, and gross domestic product. One of the most closely watched indicators of an impending recession is the yield curve. The yield curve measures the interest rate on government bonds. The curve shows the changes in interest rates over time. Typically, the interest rate – how the government issuing these securities compensates investors for risks – is higher on a bond with a longer maturity. Most of the time the yield curve is upward (positive). When the yield curve becomes downward (negative), the bond is considered riskier and, thus, may predict a recession. In the United States, the curve has faithfully indicated recessions for the past 50 years.

Unfortunately, in Pakistan, because of its large deficit, the government borrows regardless of the interest rate. In addition, the IMF dictates interest rates, which has nothing to do with the economic condition. Thus, the yield curve cannot be used as an economic indicator. On the other hand, the confidence index measures how people feel about the economy behaving in the coming days. It is a very effective measure in a consumer-oriented economy showing whether consumers will buy products that determine the economic activity of the market. If businesses and consumers feel less confident about the future, they will spend less, and the economy would contract.

Employment data is another important metric, measuring the behaviourof the job market including the percentage of the workforce that is unemployed and the number of jobs each sector has created. When the economy slows, businesses worry about future sales, so the first thing they do is to cut working hours or lay off workers.GDP measures whether an economy is growing or not. A recession basically means that the economy is in decline. But experts also compare the gross domestic product with the economy’s longer-run expectations.

In Pakistan these economic tools are not employed or only partially used. To present the real picture of the economy, we need to fully use all these metrics so that people may know where we are going. For the moment, there is total confusion in the country, with the government claiming a turnaround while people are experiencing one of the worst recessions in recent history.