Economy hit by demand compression

ISLAMABAD: Pakistan has been hit by “demand compression” resulting in fall in profitability and rise in unemployment and layoffs because of the conditionalities contained in the bailout package agreed with the International Monetary Fund (IMF), noted economists feel.“The profitability of individuals and companies falls considerably when interest rates are very high and when the stringent IMF conditions have to be implemented in exchange for soft loan facility,” prominent economist and columnist Farrukh Saleem explained to The News when contacted.Dr Kashif Zaheer Malik, Assistant Professor of Economics Department of the Lahore University of Management Science (LUMS), told this correspondent that the obsessive efforts to cut down the balance of payment gap has created a serious economic crisis, giving rise to different hardships.“When growth will contract to around three percent, income will come down, unemployment will go up and layoffs will jump up. There are no prospects that the projected growth will raise in at least next two years, which means life will be very tough,” he said.Dr Malik said that for quite some time Pakistan’s economy has been import-based and the manufacturing sector in the past 15 years has not performed well. However, the banking sector flourished because of the government borrowing from them, he said and added that the banks were too happy to lend to the government considering it a safe bet.Ironically, the economist said, the private sector borrowing from the banks has been around dismal, around 20 percent, whereas it should be much high. He said that one objective, among others, behind the recent hike in the policy rates would be to attract foreigners or overseas Pakistanis to invest in Pakistani bonds in foreign exchange thus bringing this money into Pakistan. But the flip side of the higher policy rates increase is that it shoots up debt servicing, he said.Farrukh Saleem estimated that the government was borrowing about Rs15 billion daily, which was unheard of in Pakistan’s history. He said the Pakistan Muslim League-Nawaz (PML-N) government used to borrow Rs7.7bln every day while the Pakistan People’s Party (PPP) regime used to borrow Rs5bln daily.He believed that one reason behind massive increase in debt liability and borrowing during the tenure of the incumbent government compared to the previous two regimes is that it is spread over just nine months during which the Pak rupee experienced unparalleled depreciation as against the US dollar.The economist also said that the circular debt was going up by Rs2 billion every day whereas one billion rupees was being added to it during the term of the previous government. He felt that the daily greater increase in debt was the jump in the installed capacity to 34,000MW from 22,000MW.“I was told by the power division in a briefing in August last year that the circular debt stands at Rs1,100 billion. In January/February, it rose up about Rs1,500. It has further gone up,” Farrukh Saleem said.He said that he has got information that the government recently mobilized Rs200 billion through Sukuk bonds through a Pakistani bank, which has been used to bring down the circular debt. More Sukuk bonds of a similar amount are being sold through the same bank, he believed.The economist said the payment of Rs482 billion to the private companies to clear the circular debt by the PML-N government was still pending disposal with the National Accountability Bureau (NAB).Dr Kashif Zaheer Malik said that due to the contraction of growth rate millions of people would go down the poverty line, which would be very alarming.

from The News International - National http://bit.ly/2YL9Bxt