The pandemic remained a major force influencing the growth of the Pakistani economy in 2021. But as vaccinations resumed and hold-in orders began to be lifted, the economy made noticeable progress throughout the year. along the previous year, while remaining below pre-pandemic levels on many major metrics. On other parameters – and in particular on inflation – the economy has largely exceeded the trends before the pandemic.
Talk to Geo.tv, Executive Director of the Sustainable Development Policy Institute (SDPI), Abid Qaiyum Suleri, said: “In terms of the economy, the year 2021 has had two or three distinct characteristics. First of all, when we started 2021, we quickly heard about the Delta variant, which wreaked havoc on India, plunged it into recession and claimed precious lives.
“This happened in the first half of 2021, and there were concerns that the variant would reach and create the same situation in Pakistan.”
Suleri, who is also a member of the Prime Minister’s Economic Advisory Council, said National Accounts Committee (NAC) figures ultimately showed a faster-than-expected recovery as the Delta variant did not hit Pakistan as badly. than India.
The NAC figures were also promising for large-scale manufacturing, agriculture (all major crops except cotton), remittances increased, textile sector orders increased and the current account was in surplus for the first five months, ”he said. citing official data.
Suleri noted that at the end of the 2020-21 fiscal year, Pakistan had recorded 3.94% growth in its gross domestic product (GDP).
However, as demand increased (it was already predicted in 2020 that COVID-19 would cause significant supply chain disruptions), the pressure caused setbacks in 2021.
The cost of shipping 20- to 40-foot-long containers from port to port has doubled, and the prices of commodities – petroleum, edible oils, and food prices – have risen sharply.
These two triggers touched the whole world.
“Due to the increase in demand, the pressure on the import bill has increased – and the increase in fuel prices has more than doubled.”
The economist said inflation was triggered by the rise in the dollar rate, while the cost of shipping was also a factor in the price spikes.
“The pressure impacted the rupee-dollar parity as demand for the US currency increased due to increased imports,” Suleri explained.
The main sources of inflow of dollars – remittances, exports, foreign direct investment (FDI), loans, etc.
While remittances remained stable, the amount of FDI was almost negligible and the remoteness of the International Monetary Fund (IMF) played a major role in increasing pressure on the rupee, he explained. .
“The Pakistani economy has faced four pressures: Regarding external factors, it was the disruption of the global supply chain and the increase in commodity prices, while at the level local, we have had the falling rupee and relentless local demand – which has led to soaring commodity prices. , “he explained.
“A sharp increase in the price of oil has also played a role in creating pressure on the economy, as the price of oil creates a ripple effect.”
If we analyze the recovery in this phase, Pakistan has shown a K-shaped recovery, where some sectors have recovered quickly and others have not. – Abid Qaiyum Suleri
Speaking of the challenges faced in the outgoing year, he said the real turning point in 2021 was Afghanistan, where the government fell on August 15.
The fallout from the impending fall of Kabul, however, had already reached Pakistan long before that date, as people had started to accumulate dollars. Then, foreign investments slowed down due to the uncertain situation in the neighboring country.
“After the Taliban took control and Afghanistan facing de facto sanctions, there was additional pressure on Pakistan’s foreign exchange reserves because at the time the State Bank of Pakistan (SBP) took corrective actions, [it was already too late],” he added.
It is relevant to mention here that according to the new policies of SBP, foreign exchange companies must ensure that individuals should not be allowed to buy more than $ 10,000 per day and $ 100,000 (or the equivalent in d ‘other currencies) in a calendar year.
This was done because, according to the Prime Minister’s financial adviser, $ 15 million had been smuggled into Afghanistan every day at some point to take advantage of a shortage of money in the neighboring country.
“Although it was a small amount, it triggered dollarization and dollar hoarding started in Pakistan, which compounded the challenges,” Suleri added.
Suleri added that negotiations with the International Monetary Fund (IMF) have also been affected due to the situation in Afghanistan and have been delayed because Pakistan has been used as a scapegoat by Western powers to satisfy voters who believe that Pakistan doubled them.
“Because of all this, the Fund was not in the mood for leniency and that is why the government is now in a dilemma as it has to present a mini-budget taking into account the results of the local elections. to Khyber Pakhtunkhwa, which signals that its popularity is declining, ”he said.
The economist also cited the Afghan situation as the reason for the delay in excluding Pakistan from the Financial Action Task Force (FATF).
Determinants – growth, inflation, inequalities
Suleri highlighted three factors that he said defined the Pakistani economy in 2021: growth, inflation and inequality.
“If someone asks me where can we see optimism in this scenario, I would say stagflation is worse than inflation because prices are going up but there is no growth. Fortunately Pakistan is growing and because of that growth the business cycle is on, ”he said.
Responding to comments from a former RBF chairman – without naming them – Suleri said he disagreed with experts who say Pakistan is bankrupt.
“I agree that the inflation is there and that it is mainly due to the prices of the raw materials, which you can characterize as inflation by the costs, and to some extent demand has also played its part. role, “he admitted.
Under such circumstances, he said that the central bank has only two tools: they can either depreciate the national currency to reduce imports or raise the interest rate.
“When the currency depreciates, its impact is felt by the masses. When the interest rate is increased, it has an impact on the economy, but not on the masses like the depreciation of the currency, ”he explained.
Four factors to define the economic recovery in 2022
Going forward, Suleri said he can see that Pakistan’s economic recovery and growth will significantly depend on the situation in Afghanistan.
“The second factor that will determine the economic recovery of 2022 is Omicron and its impact on Pakistan, its business partners and its supply chains.
“The third factor would be the prices of raw materials, which have already fallen slightly because of Omicron,” he said.
“And, finally, we also need to keep an eye on the IMF – if Pakistan is able to come up with a mini-budget and get it approved by January 12, and if not, what are the options with the IMF.
“These four factors will define the Pakistani economy in 2022. In the near future, I would say that inflation, especially cost inflation, is not under government control. However, the government is trying to protect the lower strata, which is a step in the right direction.