Momentum Builds as GDP Grows at 3.94 Percent

Ensuring an equitable growth in real wages is needed to sustain this momentum.

The provisional data is in and it shows that Pakistan’s GDP has grown by 3.94 percent, a figure that is significantly higher than most estimates, including that made by the International Monetary Fund (IMF). Prime Minister Khan, his government’s ministers, and economic analysts have celebrated this achievement, and rightfully so.

And if you have been reading my own analysis over the last few months, you may recall that I was not bullish on higher growth either.

The provisional data shows my pessimism was misplaced.

The provisional figures have also led to a debate among economists as well, with some like Dr. Hafiz Pasha and Dr. Sajid Amin Javed arguing that the 3.94 percent figure is an overestimation. Here is what they said in a recent article published in Dawn:

Dr Pasha said the government had admitted 22.996pc decline in growth of energy sector (electricity, gas etc). But on the other hand, it had estimated massive growth in industrial sector which could not move ahead without energy, he said.

According to Mr Pasha, the agriculture sector, which was immensely disturbed last year due to meagre cotton production, suddenly picked growth during the current fiscal year at a time when transport and communication sectors registered a declining trend. Besides, the wholesale and retail sectors continue to be in trouble.

Talking to Dawn, Dr Sajid Amin Javaid, research fellow and the chief of the Sustainable Development Policy Institute’s Policy Solution Lab, said even if low base effect was taken into account, the GDP growth estimate of 3.94pc had taken experts by surprise.

I am not going to get into the debate of whether or not the numbers will be revised upwards or downwards. We will find that out in a few months time. However, the fact of the matter is that a nascent economic recovery is taking hold in Pakistan and the upcoming budget is an opportunity to build increased momentum in the coming months.

Much of the current growth has come from economic measures taken to respond to the economic fallout of the pandemic. In my view, last year’s budget was a disappointment. Here’s what I wrote for Dawn:

The less we talk about this budget, the better. Suffice to say that by delivering an unimaginative budget that does nothing to deliver a meaningful fiscal stimulus, the government has increased the odds of a terribly severe recession in the country.

Again, I was totally wrong in making that point.

Is this momentum sustainable?

A significant contributor to this spurt in economic activity has been the State Bank of Pakistan, which has injected some 5 percent of GDP (approximately Rs. 2 trillion) into the economy over the last few months. You can read the full details of these facilities in this excellent post.

Construction is also booming, meaning that demand for steel, cement, and other industrial products is rising. Having said that, the incentives on offer for real estate development means that scarce resources may be diverted away from sectors that are important for developing long-term productivity and export potential. Note that for exports to grow, Pakistan must diversify into non-textile sectors, and to do so, it needs to provide incentives to groups beyond APTMA.

But the biggest natural headwinds to the economic recovery is high inflation, particularly in food products. This is eroding the purchasing power of millions of households, leading to a decline in real wages, and eliminating the scarce savings of households across the country.

Why is real wage growth important?

Because without a growth in real wages, households will not increase their savings. Without increased savings, Pakistan cannot create the wealth needed to domestically finance its long-term economic needs. Without that, the country will forever remain reliant on foreign borrowings to meet its investment needs.

In countries like Pakistan, real wage growth can be achieved through the growth of higher-productivity, globally competitive sectors (which lead to increased exports). So if real wages go up, odds are that they are going up because export-led sectors are thriving.

Higher growth is always good, but it is important that this growth be equitable and sustainable. Without that, we may see another era where Pakistan hits a growth rate of 5+%, following which indicators begin flashing red, leading to another economic crisis. This has happened like clockwork in the past, mainly due to the fact that the growth has not been equitable.

One hopes that history does not repeat itself. For now, things are looking positive and it will be interesting to see how the upcoming budget is crafted and whether it mobilizes resources to grow economic potential in areas that can boost productivity and real wages.