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GDP`s evolutionary dynamics

By Jawaid Bokhari 2017-10-30
MEASURED by the variable > contributions of its components, the GDP has its own evolutionary dynamics: when growth hits a peak, it opens the gate leading to a downturn, recession or depression. When trough is reached, it is followed by recovery. Pakistan has been unable to escape the GDP cycle.

Very few countries have been able to attain sustained growth for a prolonged period with country-specific, home-grown, economic models while adapting to best international practices. Those who could were able to prevent or address emerging key structural imbalances on a timely basis.

In Pakistan`s case, issues linger to become problems, which in turn reach crisis levels before being halfheartedly addressed. It is only when policymakers reach the edge of the cliff that they recognise the abyss.

Worse still, their prescription is always a failed recipe: the injection of foreign money/debt and IMFsupported stability programmes that only serve as window dressing, a breather before deep-seated imbalances emerge again.

Very little effort goes into correcting the course to nurture organic economic development. The gapbetween savings and investment is managed by inflow of foreigners` savings; trade deficit is substantially financed by workers` remittances, foreign capital and financial inflows; fiscal deficits are covered by external and domestic debts.

The cycle repeats itself, and the teeming millions must pay the price when the stability programme is put in the driver`s seat and the agenda for growth is put on the backburner.

The current momentum of growth is expected to continue in the nearterm, propelled by a surge in domestic demand. According to Finance Minister Ishaq Dar, the moment of seeking IMF support has not yet arrived. But even positive developments are unpinned by risks to economic growth.

If one looks at the quality of GDP components, the mounting risks become clearly visible with the latest data provided by the SBP`s annual report for FY2016-17.

On the domestic demand side, the share of consumption in GDP surged to nearly 94 per cent, up from 90pc over the past decade. The contribution of household consumption increased to 81.8pc of GDP from an average of 80.4pc during the last 10 years. That dwarfs the contribution of other segments of the GDP, creatingenormous structural imbalances.

On the demand side, the GDP is measured by (or is equal to) the level of consumption, government spending, investment, and exports minus imports.Despite the marked improvement in exports in the final quarter, the contribution from net exports to GDP remained negative in FY2017.

While balancing, modernisation and replacement projects are helping the textile industry boost its foreign sales, there is a strong need, as pointed out by the SBP, for policy support to boost exports of ICTrelated and Business Process Outsourcing services. The services sector is the largest and the fastest growing segment of the economy but with only a marginal share in export earnings.

The surge in imports of capital goods a strategic area shows that domestic demand is not being met by local production.

The PML-N government is now making belated efforts to curb imports of non-essential items through enhanced regulatory duties that are expected to cut imports by about $2 billion, followed by non-tariff measures to further contain the unmanageable import bill. It is not clear whether these measures will lead to import substitution.

Excluding machinery, imports grew last year by 19.1pc, a significant portion of which was consumer goods.

In FY2017, machinery imports rose by 37.1pc to $11.8bn, while onethird of the `unprecedented expansion of credit` to the private sector ofRs747.9bn was `meant for fixed investment purpose`.

The impetus for economic activity was provided by an accommodative monetary policy, tax and other incentives offered by the government over the past two years to support exporting industries, agriculture and investment. And confidence in the business environment improved with a surge in energy supplies and better security situation.

While gross fixed investment as a ratio of GDP increased marginally to 14.2pc in FY2017 against 14pc in the preceding year[e1] . But not encouraging at all was the fact that the gross fixed investment by the private sector as a ratio of GDP fell to 9.9pc from 10.2pc in FY2016..

The economy is likely to continue to expand with low and stable inflation during the current fiscal year.

Sufficient food stocks, weak domestic oil prices and a stable exchange rate, according to central bank experts, are expected to offset the impact of the expected rise in domestic demand.

But non-food and non-energy core inflation has edged up to 5.2pc in FY2017 from 4.2pc in the preceding year following a surge in domestic demand. It is the core inflation that impacts the monetary policy.

At the moment, the economy is growing with a blend of mixed trends half glass empty and half glass full providing equal opportunity to both critics and officials to vigorously project their views. But it is the direction in which things are moving that matters the most. •