EACH economic crisis has a typical transmission trajectory or trajectory. The contagion begins with a disturbance in the external account caused by a large trade gap, an increase in debt payments and / or "hot money" towards departures. Its effects are immediately felt by asset markets, where the fall in foreign exchange reserves drags both local currency and market confidence. In general, in about six to nine months, the external commotion is transmitted to the real sector of the economy, and the economic recession forces business closures and job losses.
In economies where the banking system is more integrated with global financial markets and open to foreign investment, such as Argentina or Turkey, banks are usually at the epicenter of the crisis from the beginning, which exacerbates the effects of shock. In economies such as Pakistan, where the banking system has so far been relatively isolated from foreign capital flows, banks generally face stress (depending on the severity of the crisis) towards the end of the cycle when recession conditions in the Economy lead to an increase – long-term loans. This is one more reason to isolate it from the flows of hot money, which the State Bank is encouraging.
The post-stabilization cycle works in reverse. Complemented by an IMF program, defensive measures implemented by policy makers generally stabilize the external account first, closely followed by asset markets. The real sector feels the effects of stabilization at the end. Depending on the magnitude of the crisis, private investment and re-contracting take at least one or two years to resume post-stabilization, generally longer.
In this context, it is both enlightening and depressing to point out that in the previous episode of major crisis in Pakistan in 2008, 10 years passed before economic growth managed to cross the GDP growth rate recorded one year before the beginning of that crisis
The conditions of recession prevail as a result of both the crisis and the response.
So where are we in this crisis? The external account, which received a massive blow between July 2018 and July 2019, has shown some signs of stabilization. However, it may be too early to declare that the corner has been bent. The crisis has transformed from a foreign trade shock to a debt crisis, which suggests a possible persistence. It is in this context that the general conceptual design of the Fund's program is open to valid criticism, since its size and retroactive disbursement leave in place the vulnerability of the external account, instead of attacking it strongly in advance. The implication for an early and vigorous restoration of market confidence is sadly more than obvious.
Read: Stabilization efforts that bear fruit: SBP
As expected, the shock wave of the crisis has been transmitted from the external account to the real sector. Large-scale manufacturing sector production has been in negative territory for eight consecutive months, from December last year to July 2019. Sales of cars, motorcycles, trucks, buses and durable goods have fallen tremendously, as have sales. of oil (especially high-speed diesel, a bell climate for an economic activity). Similarly, imports of capital goods, as well as credit demand from the private sector of banks have also registered a negative or decreasing growth.
As expected, exports seem to be a bright spot, however. The much-needed adjustment of the rupee, among other factors, has given a boost to exports in terms of the amount of key textile products such as clothing, knitwear, bedding and fabrics. However, in terms of the national economy, even fast-moving consumer goods have been affected by companies that report more hesitant consumers, lower sales and "downward shift" from top-level brands to lower-segment brands, as well Like smaller packages. Retail outlets anecdotally report a 60-70 percent decrease in the tread in the last two months, especially, and merchants in some of the country's main wholesale markets report a 50{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} drop in sales during The same period.
A recent national survey conducted by Ipsos Pakistan in August of this year validates bearish feelings gathered anecdotally. According to the survey results:
Compared to a year ago, nine out of 10 Pakistanis feel less comfortable buying household items in general, as well as major items such as cars, houses, etc.
Compared to a year ago, eight out of 10 Pakistanis feel less confident about their job security and their ability to save and invest in the future;
About one in three Pakistanis reported having witnessed themselves or people known to them, who lost jobs in the last year due to economic conditions;
Only one in 10 Pakistanis is optimistic about their well-being in the coming times.
Read: slowdown to persist as stabilization progresses: ADB
A large part of the economic slowdown is a "natural" result of the crisis and the resulting stabilization measures. This time, another element adds to the uncertainty, as well as the negative feelings of some economic agents: a coordinated impulse of documentation by the authorities. The reform of a entrenched status quo is, by definition, always harmful. However, this interruption is both necessary and positive, and policy makers must recognize and accept compensation with short-term growth.
However, the implication of the severity of the crisis, along with the serious documentation effort, is that Pakistan's economy is unlikely to see a rapid "V" recovery in the short term. Uncertainty between large segments of commerce and industry prevails along with the disruption of supply chains and national markets. This is unlikely to dissipate significantly over the duration of the IMF program.
However, the government can mitigate the effects with a road map rather designed to achieve a transition from stabilization to growth (subject of a later article). Greater clarity and congruence in its objectives and reform plans will lead to greater consistency in its pronouncements, which, in turn, will restore the credibility of the policies. Finally, the missing link in the economic plans of this government is strategic communication. You have to create a consistent and credible reform narrative, and then convincingly "sell it" to investors and markets.
The writer is a former member of the economic advisory council of the prime minister and runs a macroeconomic consultancy based in Islamabad.
Posted on Dawn, October 11, 2019
Source: https://www.dawn.com/news/1510216/state-of-the-economy