FeaturedNationalVOLUME 18 ISSUE # 14

Consequences of contracting economy

Pakistan’s economy is contracting after recent measures by the government to receive the International Monetary Fund bailout package. As a result, thousands of industrial units have stopped production and millions of people have lost their jobs. It is feared that the number of poor people will rise at a time when the country is facing the worst price hike of its history.

According to a recent report, about seven million people in the textile industry have been laid off due to low exports and the economic crisis. A Bloomberg report says a bunch of Pakistan’s biggest companies have halted operations in the past months as they ran out of raw materials or foreign exchange, or both, compounding the troubles of an economy that’s trying to avert a debt default. The local unit of Suzuki Motor Corp. extended the shutdown of its manufacturing plant, according to a statement to the stock exchange, saying that parts shortages are persisting. Ghandhara Tyre & Rubber Company, which manufactures tires and tubes for automobiles, had shut its plant, saying it’s facing “immense hurdles towards importing raw materials and obtaining clearance of consignments from commercial banks.” Those are just two out of a cluster of listed companies that includes manufacturers of fertilizers, steel and textiles that have shut their factories indefinitely or suspend operations intermittently as they grapple with a shortage in inventory or cash, or even a drop in demand, the report added. Like Suzuki, Honda Motor Co. and Toyota Motor Corp.’s local units also went through weeks-long plant closures. This weighed on Pakistan’s car sales which fell 65pc to the lowest in almost three years in January compared to a year ago, according to Pakistan Automotive Manufacturers Association data. Among those that have also shut or slowed operations are GSK Plc’s Pakistan unit, Engro Fertilizers Limited, Fauji Fertilizer Bin Qasim Limited, Nishat Chunian Limited, Amreli Steels Limited, Millat Tractors Limited and Diamond Industries Limited.

The Fitch Ratings agency downgraded Pakistan’s long-term foreign-currency issuer default rating (IDR) to ‘CCC-’, from ‘CCC+’ due to worsening liquidity, political volatility and decline of foreign-exchange reserves to critically low levels. In a note defining its action, Fitch explained that the downgrading reflects further sharp deterioration in external liquidity and funding conditions and the decline of foreign exchange reserves to critically low levels. On the other hand, Fitch Solutions projected Pakistan’s economic growth to contract by 0.3pc in the current fiscal year. The US-based global research house said the country’s economic challenges are going to multiply, going forward.

The World Bank forecast Pakistan’s economic growth to slow further to two per cent during the current year — down by two percentage points from its June 2022 estimate — because of the devastating floods and slowdown in global growth rate. The World Bank’s forecast also points to a “sharp, long-lasting slowdown” with global growth pegged at 1.7pc this year, compared to 3pc it predicted in June, said the bank’s latest Global Economic Prospects report, a flagship publication of the World Bank Group. It said that global growth was slowing sharply in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine.

In the report, the Washington-based lending agency said Pakistan’s economic output was not only declining itself but also bringing down the regional growth rate. It forecast Pakistan’s GDP growth rate to improve to 3.2pc in 2024, but that too would be lower than the earlier estimate of 4.2pc. “Policy uncertainty further complicates the economic outlook” of Pakistan, in addition to flood damages and the resultant increase in poverty,” the bank said, explaining that an already precarious economic situation in Pakistan, with low foreign exchange reserves and large fiscal and current account deficits, was exacerbated in August last year by severe flooding, which cost many lives. “Recovery and reconstruction needs are expected to be 1.6 times the FY2022-23 national development budget,” it said, adding that the flooding is likely to seriously damage agricultural production — which accounts for 23pc of GDP and 37pc of employment — disrupting the current and upcoming planting seasons and pushing 5.8 million at 9m people into poverty. The South Asian region is anticipated to grow by 5.5pc and 5.8pc in 2023 and 2024, respectively — slightly 0.3pc to 0.7pc lower than earlier estimates — mainly because of supporting 6.6pc and 6.1pc GDP growth in India. “This pace reflects still robust growth in India, Maldives, and Nepal, offsetting the effects of the floods in Pakistan and the economic and political crises in Afghanistan and Sri Lanka. The deteriorating global environment, however, will weigh on investment in the region,” the report said.

In the region excluding India, growth in 2023 and 2024 — at 3.6pc and 4.6pc, respectively — is expected to underperform its average pre-pandemic rate. This is mainly due to weak growth in Pakistan, which is projected at 2pc in FY2022-23, half the pace that was anticipated in June last year. Pakistan faces challenging economic conditions, including the repercussions of the recent flooding and continued policy and political uncertainty. As the country implements policy measures to stabilise macroeconomic conditions, inflationary pressures dissipate, and rebuilding begins following the floods, and growth is expected to pick up to 3.2pc in FY2023-24 — still below previous projections, the report noted. The IMF forecast Pakistan’s economy to grow by 2pc in FY2023, 1.5pc lower than what it projected in the October 2022 World Economic Outlook (WEO).

It is clear that Pakistan’s economy is contracting because of national and international reasons. As the government has imposed more taxes, withdrawn subsidies and hiked electricity and gas tariffs, more industrial units will shut down in the coming weeks and millions of people could lose jobs. It will add to poverty at a time when inflation has broken all records in the country.