The pandemic remained a major force influencing growth in the Pakistan economy in 2021. But as vaccinations picked up and stay-in-place orders began getting lifted, the economy made notable strides throughout the outgoing year, albeit while remaining below pre-pandemic levels on many major metrics. On other metrics — and notably on inflation — the economy handily exceeded pre-pandemic trends.
Speaking to Geo.tv, Sustainable Development Policy Institute (SDPI) Executive Director Abid Qaiyum Suleri said: “In terms of the economy, the year 2021 had two or three distinct features. First, when we started 2021, we soon learned about the Delta variant, which created havoc in India, pushed it into recession and took precious lives.
"This happened in the first half of 2021, and it was feared that the variant might reach and create the same situation in Pakistan.”
Suleri, who is also a member of the Prime Minister’s Economic Advisory Council, said the numbers from the National Accounts Committee (NAC) eventually showed a faster than expected recovery as the Delta variant did not hit Pakistan as bad as it did India.
“The NAC’s numbers were also promising when it came to large scale manufacturing, agriculture (all major crops except cotton), remittances were increasing, textile sector’s orders were surging, and the current account was in surplus for the first five months,” he said citing official data.
Suleri noted that by the end of fiscal 2020-21, Pakistan had recorded 3.94% growth in its gross domestic product (GDP).
However, as demand picked up (it had already been predicted in 2020 that COVID-19 would cause significant supply chain disruptions), the pressure caused setbacks in 2021.
The cost of shipment of 20-40 feet long containers from one port to another doubled and commodity prices — petroleum, edible oils, and food prices — increased sharply.
These two triggers impacted the entire world.
"As a result of the increase in demand, the pressure on the import bill increased — and the increase in fuel prices was more than double.”
The economist said inflation was triggered by the rising rate of the dollar, while the cost of shipments was also a factor in surging prices.
“The pressure impacted the rupee-dollar parity, as the demand for the US currency was increasing due to increase in imports,” Suleri explained.
The main sources of dollar inflow — remittances, exports, foreign direct investment (FDI), loans, etc — could not keep up, although there were bright spots here and there.
While remittances remained stable, the amount of FDI was almost negligible, and estrangement from the International Monetary Fund (IMF) played a major role in increasing the pressure on the rupee, he elaborated.
“Pakistan’s economy faced four pressures — when it came to external factors, it was the disruption in the global supply chain and increase in commodity prices, while locally, we had the declining rupee and unabated local demand — which led to a surge in commodity prices,” he explained.
“A sharp increase in petroleum prices also played a role in creating pressure on the economy, as the price of petroleum creates a ripple effect."
If we analyse the recovery to this phase, Pakistan showed a K-shaped recovery, where some sectors recovered rapidly and some did not. — Abid Qaiyum Suleri
Speaking about the challenges faced during the outgoing year, he said the real twist in 2021 was Afghanistan, where the government fell on August 15.
The fallout from the impending fall of Kabul had, however, already reached Pakistan much before then, as people had started hoarding dollars. Then, foreign investment slowed down because of the uncertain situation in the neighbouring country.
“After the Taliban takeover and Afghanistan faced de facto sanctions, there was added pressure on Pakistan’s foreign exchange reserves because by the time the State Bank of Pakistan (SBP) took corrective measures, [it was already too late]," he added.
It is pertinent to mention here that according to the new SBP policies, exchange companies have to ensure that individuals must not be allowed to purchase more than $10,000 in a day and $100,000 (or equivalent in other currencies) over the course of a calendar year.
This was done because, according to the prime minister's finance adviser, $15 million were being smuggled to Afghanistan each day at one point to take advantage of a shortage of cash in the neighbouring country.
"While this is a small amount, it triggered dollarisation and the hoarding of dollars began in Pakistan, which added fuel to challenges,” Suleri added.
Suleri further added that negotiations with the International Monetary Fund (IMF) were also affected because of the situation in Afghanistan and were delayed because Pakistan was used as a scapegoat by western powers to satisfy constituencies which believe Pakistan double-crossed them.
“Due to all this, the Fund was not in a mood to give any leniency and this is why the government is now in a dilemma as it needs to present a mini-budget keeping in view the results of local body elections in Khyber Pakhtunkhwa, which signal that its popularity is declining,” he stated.
The economist also cited the Afghan situation as a reason behind the delay in Pakistan’s exclusion from the Financial Action Task Force (FATF).
Defining factors — growth, inflation, inequality
Suleri highlighted three factors that he thinks defined Pakistan’s economy in 2021 — growth, inflation and inequality.
“If somebody asks me where can we see optimism in this scenario, I would say that stagflation is worse than inflation, as prices rise but there is no growth. Fortunately, Pakistan is witnessing growth and because of this growth, the economic cycle is running,” he claimed.
Addressing comments made by a former FBR chairman — without naming them — Suleri said that he does not agree with experts who say Pakistan is bankrupt.
“I would agree that inflation is there and most of it is because of commodity prices, which you can refer to as cost-push inflation, and to some extent, demand has also played its role,” he acknowledged.
During such circumstances, he stated that the central bank has only two tools: they can either depreciate the domestic currency to curtail imports or increase the interest rate.
“When the currency depreciates, its impact is felt by the masses. When the interest rate is increased, it impacts the economy, but does not impact the masses like currency depreciation does,” he explained.
Four factors to define economic recovery in 2022
Going forward, Suleri said he can see that Pakistan’s economic recovery and growth would be significantly dependent on the situation in Afghanistan.
“The second factor which will determine 2022’s economic recovery is Omicron and how it affects Pakistan and its trading partners and supply chains.
"The third factor would be commodity prices, which have already slightly reduced because of Omicron,” he said.
“And, lastly, we need to keep our eyes on IMF as well — whether Pakistan is able to present a mini-budget and have it approved before January 12, and if not then what are the options with IMF.
“These four factors will define Pakistan’s economy in 2022. In the near time, I would say that inflation, especially cost-push inflation, is not in the government’s control. However, the government is trying to protect the lower strata, which is a step in the right direction.