ALTHOUGH there is no single definition of a recession, it is often defined as a significant decline in economic activity that lasts for months or years. Many experts declare a recession when a country’s economy is experiencing a negative GDP, rising unemployment, declining retail sales, and creating long-term investment and production problems.
In Pakistan, dangerously unstable currencies, high risk capital in international financial markets, high debt and the recent shock of floods add to our sad story of economic collapse. Low prices and softening of global import demand and China’s slowdown will add pressure on Pakistan and the region. Prima facie, all these economic indicators point to a recession in Pakistan.
The global economic outlook also looks grim. Since the beginning of the year, the rapid deterioration of growth prospects, together with the rise in inflation and the tightening of monetary conditions, has led to a debate about the possibility of a global recession in 2023. According to the IMF, the main drivers of this dubious opinion are the collapse. in China and Russia, US consumer spending and economic pressures due to higher-than-expected global growth. In addition, the fallout from the war in Ukraine is adding to the economic crisis. In July 2022, the IMF lowered its global growth forecast for 2022 to 3.2 percent from 6.1 percent last year – 0.4 percent lower than forecast in the last update in April. The expected global recession could cause more damage than the financial crisis in 2008, warned UNCTAD in the Trade and Development Report 2022.
With inflation higher than expected – especially in the US and major economies in Europe – the global economy is growing. The recent U.S. interest rate hike will reduce $360 billion in future investment by developing countries excluding China, where all investment flows to developing countries have reversed. In fact, developing countries are now giving money to developed countries, the report said. Rising interest rates are hitting the most vulnerable countries hardest. 90 developing countries have seen the biggest depreciation of their currencies against the dollar this year.
So, what will happen in a recession that could last more than a year, if at all? In the case of Pakistan, the challenge could be dire as the country is facing one of the most pressing issues in terms of remittances. Foreign exchange reserves have fallen sharply to a measly $6bn, barely enough to cover a month’s worth of foreign purchases. This has led to a strong decline in interest rates in Pakistan and business confidence. Political instability and rising terrorist threats add to the bleak economic outlook. So, what kind of policy response is needed and expected from the government to deal with the recession?
Prima facie, negative economic indicators point to a recession in Pakistan.
First, the government needs to understand how the global recession is slowing down and how it will affect Pakistan’s economy. There has not been any relief in the IMF program or humanitarian response to cover the damage caused by the floods. Pakistan has no choice but to complete the IMF program which will expire in June 2023. There is no doubt that Pakistan will need another IMF program to complete the reform process within the next three years. Forecasts for GDP growth in 2023 have already been lowered to 2-3pc and will continue to be low during the transition period as the IMF pushes for monetary tightening and pressure to lower inflation. There will be a high political cost for any government to follow through on past commitments to cut subsidies, reform the electricity sector and remove a number of distortions. The recognition of continued support from Saudi Arabia and China is also linked to the approval of the Fund. China’s decline has been worse than expected due to the Covid-19 outbreak and the lockdown. In addition, further foreclosures and a worsening housing crisis in China have pushed growth to 3.3% this year – the slowest pace in more than four decades, barring the pandemic.
Secondly, the problems caused by the high cost of doing business, the decrease in the number of people we do business with and the lack of competition in the manufacturing industry. Exports and traditional FDIs are already showing a decline. Some of the major countries may consider reducing their operations in Pakistan because the growth of the Eurozone has been revised to 3% this year and 1.2pc in 2023.
Third, job cuts are imminent during the recession and the pressure on non-performing loans will be high on banks. With 2.5 million new entrants into the labor market each year, there is no way the current economic climate will provide decent job opportunities for young people. Pakistan should prioritize and invest in knowledge-based skills such as IT and nursing, and plan to send people to aging countries such as Japan and Germany. This will not only reduce the workload but also increase the remittances.
Some losses are expected in the stock market and real estate but both sectors are linked to the wealthiest groups of people. Since a large part of Pakistan’s economy depends on regular transactions, it can protect small and medium enterprises from other financial problems due to less dependence on bank loans.
Among the few options, the only way forward during the recession will be to reduce unnecessary imports and rely on oil, conserve energy and sell shares in profitable state-owned enterprises to raise foreign exchange. Incentives should be created to increase production of essential nutrients and productivity in manufacturing industries. The authorities should consider changing their focus from development projects to subsidies provided by organizations that have been given to implement the necessary reforms to create a diversified development for economic stability.
The author is a leading expert on development and economic policy. He currently advises the UN and governments as a leading expert on development finance.
Published in Dawn, December 25, 2022