Pakistan: Central bank remains cautious ahead of some key milestones

The State Bank of Pakistan (SBP) maintained the policy rate at 22% for the seventh consecutive meeting. Despite considerable disinflation in February, the SBP chose to remain cautious. There remain risks to future inflation – from further increases in administrated prices (of energy) and tax measures in the FY25 budget could be inflationary. The decision was in line with market consensus.

Key reasons for the decision:

The outlook for GDP growth – in the range of 2-3% in FY24 – remains intact and is largely driven by the rebound in the agricultural sector (which does not respond to monetary policy), while the LSM growth has recently turned positive (down a moderate 0.5% YoY in 7MFY24).

Core inflation (urban), which had hitherto been sticky, fell to 18% in February from 20.5% in the earlier month, while urban wages growth has also slowed in recent months. Nonetheless, headline inflation remains elevated and warrants a cautious stance.

The external account has improved considerably as well. Current Account balance during July-January period was US$1.1 billion only, as compared to US$3.8 billion for the same period last year. This was mainly on the back of contraction in imports, down 11% YoY in 7MFY24 amid a slowing economy (also partly due to lack of flood induced imports last year).

Primary balance improved to 1.7% of GDP in 1HFY24 from 1.1% for the same period last year, on the back of strong growth in revenues and contained expenditure. The SBP considers the continuation of current fiscal consolidation as important to support the present monetary policy stance.

The decision was largely expected and thus will lead to a muted response from the equity and money markets.

Trends in the above macro indicators are encouraging and could support a first cut in rates in the April 2024.

However, a key factor for future monetary policy will be talks with the IMF for a new program, which may commence at the IMF-World Bank Spring meetings due 19-21 April 2024.

That will shape the FY25 Budget and whether the IMF demands further adjustments in energy prices and exchange rate during the negotiations.

 

 

Focus on agriculture can pull Pakistan out of current economic malice

At present Pakistan faces myriad of problems, from rising food import bill to very limited availability of foreign exchange. While the industrial sector remains import dependent, focus on two of the large scale industries i.e. textiles and clothing and sugar and allied can yield multiple benefits: from huge earning of foreign exchange to creating extensive employment for low-skill workers. However, this requires commitment of the government, introduction of supporting policies and implementation of these policies in letter and spirit.

It is on record that 20% to 40% of agriculture produce goes stale before reaching the market. This on one hand deprives the farmers from modest return of their efforts and on the other hand creates shortages and use of paltry foreign exchange available to Pakistan. It is pertinent to point out that the Government of Pakistan (GoP) had come up with Warehouse Receipt Financing (WRF) program as back as in 2013. The lack of commitment on the part of the GoP as well as the financial institutions has failed in facilitating construction of modern grain storage silos in the country.

Over the years the GoP has been increasing quantum of lending to farmers and the indicative target for the current financial year is PKR1.8 trillion. The lending is being done under two heads: for the purchase of inputs and for the development. The most shocking part is that some of the financial institutions prefer to pay the penalty, rather than extending credit to farmers. This has resulted in exclusion of small farmers from the formal banking system.

Financial institutions have been lending to farmers against ownership documents of their land. Despite multiple land reforms, bulk of the land is still owned by the feudal lords. Small land holders or those who have no land ownership documents have remained out of the formal banking system. WRF system was conceived as an alternative system for financial inclusion. Under this scheme farmers could use their produce as collateral and secure funds from the financial institution.

If the GoP is serious it has to take on board State Bank of Pakistan, Securities & Exchange Commission of Pakistan, commercial banks and Naymat Collateral Management Company to undertake construction of grain storage silos on war footings.

The most disappoint fact is that the country produces over 25 million tons wheat, the federal and provincial governments are the major buyers but virtually no wheat storage silos are present. Bulk of the produce is kept in warehouses not fit for the storage of staple food grain. The result is over 20% of the produce goes stale before reaching the market.

I was amazed to hear from some religious clerics that construction and management of warehouses is not Shariah compliant, the basic objection is it facilitates hording. They are unable in distinguishing between ‘safekeeping’ and ‘hording’.

Pakistan earns bulk of its foreign exchange from export of textiles and clothing. Without any exaggeration the country is capable of producing 20 million bales of medium staple fiber. However over the last few years cotton production has reduced to around 6 million bales. An output of 10 million bales can be attained by: using certified quality seed, stopping cultivation of sugarcane in sugar belt and using certified quality of pesticides/insecticides. This would also help in boosting production of ‘cotton seed oil’ – an edible oil as well as oilcakes for feeding cows and buffaloes.

The third important crop is sugarcane which not only produces sugar but also exports ethanol and molasses in huge quantities. Cultivation of superior quality sugarcane varieties can help in boosting production of sugar, molasses and ethanol.

It is necessary to remind the policy planners, if they still don’t know, that ethanol is used for the production of bio-fuels. At one time the GoP had started sale of E-10 - petrol containing 10% ethanol. Only the policy planners know why this project was abandoned?

Maize is yet another crop that can help in containing food import bill. Maize yields oil, flour and oilcake (used in the production of chicken feed). Now cultivation of two crops is a norm and in certain areas third crop is cultivated.

It may be pertinent to mention that maize yield in Pakistan is substantially low and the prime reason is high price of DAP fertilizer.

This takes to another key industry, fertilizer industry. Over the years the industry has help in saving precious foreign exchange. Now it has the capacity to export one million tons of urea. At times the country has to import urea, which is due to the bad policy of stopping gas supply to fertilizer plants during winter.

The GoP must also facilitate running of power plants on furnace oil. The plea taken by the GoP for not running power plants on furnace oil is most absurd – it contains high percentage of sulphur. The GoP must immediately arrange fund for installing sulphur at local refineries. It would yield two benefits: use of furnace in local power plants as well as its export - extra foreign exchange will be earned from the export of sulphur.

 

 

 

 

 

 

 

United States GDP falls for second straight quarter

Economy of the United States appeared to shrink for the second consecutive quarter, according to federal data released Thursday, amid growing concern the country could be slipping into a recession.

US gross domestic product (GDP) shrunk between April and June, the Commerce Department reported, marking the second-straight quarter of economic contraction.

GDP fell at a yearly pace of 0.9% in the second quarter, according to the Commerce Department’s first estimate of economic growth over the previous three months.

“The US economy is struggling,” Scott Hoyt, senior director at Moody’s Analytics, wrote in a Thursday analysis.

“We now expect growth to struggle to reach potential both this year and next. However, we don’t believe the economy is in a recession,” he continued.

Many economists expected GDP to fall for a second consecutive quarter as the economy faced more pressure from high inflation, rising interest rates, slowing job growth, falling home sales and other headwinds. 

While the economy was almost certain to slow after growing 5.7% in 2021, experts have become more fearful of the US slowing into a recession after GDP fell at an annualized rate of 1.6% in the first quarter.

Two straight quarters of negative economic growth have long been used as a rule of thumb to determine when the US is in recession and is the formal threshold for a recession in other countries. But economists in the US consider a broader range of data when determining if the US is in recession.

“The headline of a second straight decline in real GDP highlights the abrupt change in the path of the US economy, but the ongoing strength in the job market and other signs of growth make it unlikely that this will be categorized as a recession at this point,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association, in a Thursday analysis.

A steep decline in business investment and a 3.1% surge in imports, which detract from GDP in calculations, were the two major forces behind the second quarter decline.

 “The data fits with our view that the rate of US economic growth will slow noticeably this year, as households and businesses grapple with record high inflation and a steep rise in interest rates,” Cailin Birch, a global economist at the Economist Intelligence Unit, said in a Thursday analysis.

President Biden and White House officials have tried to convince Americans that the US economy is not yet in a recession thanks to a strong job market. They’ve focused heavily on the NBER’s definition of a recession to show Americans that the economy is not as weak as it may seem.

“It’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation. But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure,” Biden said in a Thursday statement.

Republican lawmakers were quick to release their own declarations of recession. They blamed Biden for driving the economy into ruin and accusing the White House of trying to dupe the American people.

“As Biden and his Democrat allies in Congress busy themselves with changing the definition of a recession, Americans continue to shoulder the burden of troublesome economic conditions,” Rep. Blaine Luetkemeyer, the ranking member on the House Small Business Committee, said in a Thursday statement.

The Federal Reserve is likely to keep boosting interest rates as inflation rises, which will continue to slow the economy, as the war in Ukraine and pandemic-related supply chain challenges threaten to make inflation worse.

 “Whether the economy meets the conventional or formal definition of recession is in many respects immaterial. Either way, households and firms are reeling from combined energy, inflation, and rate shocks that have damped individuals’ purchasing power and are in the process of reducing household living standards,” wrote Joe Brusuelas, chief economist at audit and tax firm RSM.

“That is the toll levied by the inflation tax and is why it is critical to restore price stability to the economy as soon as is reasonably possible,” he continued.

 

Rising remittances prove issuing Eurobonds was a bad decision for Pakistan

In one of my recent blogs I had opposed the idea of flotation of Eurobonds. It was based on two premises: 1) the issue will add to debt servicing and 2) the rate of return being offered is fabulous. I had also suggested that whatever amount Eurobond will provide would be mobilized in less than a month.

A review of remittance received indicates that receipts extended their unprecedented streak for the 10th consecutive month in March 2021 and rose to US$2.7 billion for the month, 20% higher than earlier month and 43% higher than March 2020. 

Cumulatively during first 9 months of current financial year (FY 21) remittances rose to US$21.5 billion, up 26% over the same period of FY20.

Remittance inflows during the period under review were mainly originated from Saudi Arabia (US$5.7 billion), United Arab Emirates (US$4.5 billion), United Kingdom (US$2.9 billion) and the United States (US$1.9 billion).

Proactive policy measures taken by the Government of Pakistan (GoP) and State Bank of Pakistan (SBP) to encourage inflows through official channels, limited cross border travel due to the COVID-19 and orderly foreign exchange market conditions contributed to this sustained rise in workers’ remittances.

I am still concerned about deteriorating balance of trade situation of Pakistan. The deficit during first nine months of FY21 swelled to US$21.241 billion from US$17.352 billion over the corresponding months of last year, reflecting an increase of 22.4%. The surge in trade deficit has been mainly led by higher growth in imports and lower growth in exports.

During the period under review, import bill increased by 14.68% to US$39.91 billion, from US$34.799 billion. This hike was contributed by import of raw material as well as import of wheat, sugar and cotton. As against this, export proceeds rose by 7% to US$18.669 billion, from US$17.447 billion.

I am also inclined to draw a conclusion that Pakistan would have faced serious balance of payment crisis, had there been not so huge influx of remittances. Even IMF tranches and borrowing from friendly countries would have proved too paltry.

Therefore, it is suggested that GoP must look into the problems faced by overseas Pakistani, particularly those living in UAE and Saudi Arabia. Similarly, efforts should also be made to convince these countries to resolve problems faced by Pakistanis.