Aggregate Demand

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4 Aggregate Demand 4.1 Overview Aggregate demand showed a moderate increase of 3.7 percent during FY12. The domestic market was responsible for the increase, as external demand faltered substantially during the year (Figure 4.1).1 Factors including higher remittance inflows (so far immune to the global crisis), a vibrant informal economy, and a surge in fiscal spending, appear to have underpinned domestic demand. Figure 4.1: Growth in Aggregate Demand FY10 FY11 FY12 20.0 15.0 10.0 percent 5.0
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    4 Aggregate Demand  4.1 Overview Aggregate demand showed a moderate increase of 3.7 percent during FY12. The domestic market was responsible for the increase, as external demand faltered substantially during the year ( Figure 4.1 ). 1  Factors including higher remittance inflows (so far immune to the global crisis), a vibrant informal economy, and a surge in fiscal spending, appear to have underpinned domestic demand. Indeed, given the bearish outlook of the global economy, domestic demand is indispensible for Pakistan‟s economic growth . However, the current demand structure is not conducive for sustaining the growth momentum: while consumption  –   especially private consumption  –   continues to remain strong, investments fell for the fourth consecutive year. The investment-to-GDP ratio has reached a low of 12.5 percent ( Figure 4.2 ). Behind this trend were investor apprehensions regarding the current state of law and order, and the issue of energy availability (see Section 4.2.2  for details). In our opinion, this composition of domestic demand was also an outcome of the government‟s  fiscal strategy over the previous few years: while public investment has declined since FY09, pro-consumption fiscal measures have increased that include higher spending on untargeted subsidies, income support programs, increase in pensions and  public salaries, and duty cuts on consumer items (see Chapter 6 ). In addition, we also know that worker remittances are typically channeled into household consumption and construction. 2   1  We consider continuous weakening in the global economy and domestic competitiveness issues as the major reasons for the decline in external demand for our goods and services. Here, it is important to mention that the exports, shown in the national income accounts, also reflect some impact of supply-side constraints (including energy shortages). 2  For example, Nishat and Bilgrami (1991). This study has concluded that in Pakistan, remittances have the largest impact on consumption, and smallest on private investment. (Complete citation: „The Impact of Migrant Workers‟ Remittances on Pakistan Economy‟, Mohammed Nishat and Nighat Bilgrami, Pakistan Economic and Social Review , Vol. 29, No. 1 (Summer 1991), pp. 21-41). Similarly, using the data for 84 countries for the period 1970-2004, the IMF Working Paper  No. WP/09/153 „Do Workers‟ Remittances Promote Economic Growth?‟ (2009) by Adolfo Barajas, Ralph Chami, Connel Fullenkamp, Michael Grapen and Peter Montiel has concluded that the remittances are not intended to serve as investments,  but rather as social insurance to help family members finance the purchase of life‟s necessities. Therefore, although remittances lift people out of poverty, but they do not typically turn their recipients into entrepreneurs. 6570758085900510152025      F     Y     0     2     F     Y     0     3     F     Y     0     4     F     Y     0     5     F     Y     0     6     F     Y     0     7     F     Y     0     8     F     Y     0     9     F     Y     1     0     F     Y     1     1     F     Y     1     2 InvestmentGovt. consumptionPvt. consumption (rhs)     p    e    r    c    e    n     t    p    e    r    c    e    n     t Figure 4.2: Demandas Percent of GDP Source: National Income Accounts PBS -15.0-10.0-5.00.05.010.015.020.0 Domestic demand (C+I+G)External demand (X) FY10FY11FY12 Figure 4.1: Growth inAggregate Demand     p    e    r    c    e    n     t Source:  National Income Accounts, PBS. Domesticdemand includes consumption (both public and private) and investments. External demand is gross export of goods and services.  State Bank of Pakistan Annual Report 2011-12 42 4.2 Consumption  Real consumption grew by 11.1 percent during FY12, compared to 3.9 percent a year earlier. 3  Although sales data is not available for most consumer items, there are indications of buoyancy in consumer spending:  4  for example, revival in construction and ancillary industries; higher production and import of consumer goods ( Table 4.1 ); increase in sales tax collection by 15 percent despite a 100  bps reduction in tax rate; 5  strong public interest in retail exhibitions; new shopping malls and growing sales volumes; restaurants; increase in overseas travelling; and leading global brands opening their outlets in the country. Furthermore, the impressive performance of fast moving consumer goods (FMCGs) also supports this trend. 6  Within a high-inflation-low-growth environment, floods in last 2 years, and sluggish employment conditions in the country, the trend in consumer spending appears anomalous. 7  In our view, it was the income generated mainly from outside  the domestic formal economy, i.e., remittances and the 3  Consumption is calculated by Pakistan Bureau of Statistics as a residual in the national accounts identity: C = Y  –   I  –   NX; where C is consumption, Y is GDP, I is investment and NX is net exports. Conceptually, this method allows errors in the measurement of GDP, or other components, to creep into the consumption estimates. 4  Sales data is available only for domestically produced cars and cement, which shows a growth of 18 percent and 8.8  percent in FY12, respectively. Although POL sales information is also available, but it is not meaningful given the  prevailing gas shortages, and forced substitution of petrol/furnace oil over gas. 5  This includes sales tax collected only on domestic goods. 6  The net profits of FMCGs listed on the Karachi Stock Exchange grew by over 20 percent in FY12. Here it is important to mention that the FMCGs‟ bottom -line has been growing this rapidly since last 5 years, and the sector has outperformed the KSE-100 index with a wider margin. 7  This was unlike the consumption boom in 2003-08, when the economy was on a high growth trajectory and the inflationary  pressures were low. This boom was driven mainly by monetary activism that led to an unprecedented growth in private credit, especially to the consumer sector. Table 4.1: Import of Selected Consumer Durable Goods import quantity in units given; growth rate (of import quantity) in percent; import value in million US$  Units   Import quantity Growth rate Import value Items FY09 FY10 FY11 FY12 FY12 over FY11 FY12 Grinders/mixers/juicers No. 605,326 782,332 397,089 439,481 10.7 6.5 Ovens/grillers/roasters No. 7,436 10,681 16,994 23,234 36.7 0.5 Coffee/tea makers No. 42,246 31,871 53,369 56,621 6.1 0.8 Complete dinner sets dozens 92,946 2,872,98 440,873 577,598 31.0 8.3 Plates/dishes/teacups dozens 234,112 173,080 226,938 330,099 45.5 1.4 Other table/kitchenware No. 44,310 69,085 138,585 191,067 37.9 2.8 Electric iron No. 177,850 294,780 282,081 290,377 2.9 1.1 Laptop No. 40,385 83,462 82,565 282,559 242.2 72.1 LCDs No. 11,480 6,294 1,912 4,934 158.1 1.3 Cellular phones million nos. 3.8 11.0 12.3 29.2 137.0 688.4 Earphones million nos. 1.0 0.9 1.3 2.2 77.6 5.6 Footwear million pairs 11.8 13.2 21.6 23.0 6.8 77.6 Worn clothing million kg 263.4 252.9 353.8 403.1 13.9 148.0 Handbags No. 550,983 590,305 1,245,948 1,519,344 21.9 5.4 Remote controls million nos. 2.0 4.8 8.8 11.3 28.2 4.5 Digital cameras and recorders No. 17,296 27,385 28,072 36,903 31.5 1.0 Air-conditioners No. 74,952 56,885 38,474 58,042 50.9 15.4 Refrigerators No. 20,390 23,832 14,571 26,172 79.6 7.3 Electric fans No. 283,701 526,378 607,193 715,185 17.8 8.6 Ceramic tiles and bricks million kg 17.8 13.1 5.3 10.4 96.1 16.9 Sanitary fixtures No. 260,605 251,983 274,618 336,373 22.5 3.4 Energy saving bulbs million gram 1.4 1.8 1.1 4.7 316.5 72.7 Rubber tyres and tubes million nos. 4.0 3.7 5.4 6.0 12.0 229.5 Source: Pakistan Bureau of Statistics   Aggregate Demand    43  informal sector, which has helped support economic growth. 8  At the same time, we also believe that fiscal measures to support household incomes and expenditures over the previous years, proved effective. We consider remittance growth as the prime stimulant for consumer spending in the country. This additional income has lifted household demand for various necessities and luxuries, and has also triggered private construction activity. In this context, it is not surprising to see a number of residential projects initiated across the country for overseas Pakistanis alone. In fact, Pakistan is not the only country where consumption growth is associated with inward remittance flows, there is sufficient empirical evidence that in most developing economies, remittance income is used for consumption and financing real estate activities. 9  Similarly, we believe that a vibrant parallel economy is also seeping into consumption demand in the formal sector. Findings of the Household Integrated Economic Survey (HIES) 2011, show that the incomes derived from business activities (including services industry in the informal sector) posted the highest real increase amongst all the income sources during FY08-11 ( Box 4.1 ). 10  In addition to these factors, fiscal spending has also buoyed consumer sentiments: (i) subsidized energy and food has contained household expenditures on these items, which has encouraged other spending; (ii) cut in federal excise duty on electronics, and elimination of special excise duty on automobiles, have propped-up sales; and (iii) increased government spending on pensions, income support programs (e.g., Benazir Income Support Program) and other transfers, have shored up household incomes and consumption. Box 4.1: Key Insights from the Household Integrated Economic Survey 2008 and 2011 HIES data provides useful insights about real consumption patterns of urban households, especially regarding the disparity in consumption trends across various income groups during FY08-FY11. 11  At first, the survey results show that the increase in real incomes and real consumption of households was smaller in FY08-11, compared with FY02-07. During FY02-07, household sector had enjoyed significant increase in wages and salaries, as well as house rents. In contrast, the highest increase during FY08-11 was seen in incomes derived from business activities (including, services and small-scale manufacturing in the informal sector), which have risen  by 4 percent annually in real terms ( Figure 4.1.1 ). 12  Given their record increase in recent years, foreign remittances are a close second. Real incomes from other sources have remained, more or less, unchanged during this period. 8 We believe that the informal economy in Pakistan is growing much faster than the formal economy. Therefore, GDP growth understates the actual economic growth in the country. 9  See for example, IMF Working Paper No. WP/03/189 „Are Immigrant Remittance Flows a Source of Capital for Development‟ (2003) by Ralph Chami, Connel Fullenkamp and Samir Jahjah. 10 HIES survey is conducted after every four years. Therefore, survey results for 2007 and 2011 are compared. 11 Real consumption is calculated after adjusting for change in prices using changes in the CPI. Since the CPI (like other available price indices) is a survey of prices in urban centers, and, due to the prevalence of barter trade and sustenance farming in the rural sector, there is no appropriate price benchmark for calculating real incomes and consumption in the rural or aggregate economy. 12   This is classified as “other non - agri activities” in the survey.   -1 1 3 5 7 9TotalWages and salaries Non-agri activitiesProperty Foreign remittances     p    e    r    c    e    n     t FY02-07FY08-11 Figure 4.1.1: Change in Real Incomes of Urban Households by Source (CAGR)Source : HIES, Pakistan Bureau of Statistics  State Bank of Pakistan Annual Report 2011-12 44 It is important to mention here that the increase in real incomes and consumption of urban households is concentrated only in the upper-class and upper-middle class (i.e., the top 40 percent of households by income). Other income groups have actually witnessed a fall in  both their real incomes, and in their real consumption. Household consumption patterns are even more revealing. As Figure 4.1.2  illustrates, the urban  population is spending more  on food and clothes in real terms than it was four years ago. Interestingly, food‟s share in household consumption basket is not just the largest, but has also increased from 44.2 percent in FY08 to 48.9 percent in FY11. Anecdotal evidence also suggests an increase in demand for processed food, dairy  products and beverages; in fact, investors have been  positioning themselves to take advantage of this opportunity. 13  Compared to FY02-FY07, a period often associated with the consumption boom, spending on apparel in real terms has actually been rising faster in FY08- 11. SBP‟s 3 rd  Quarterly Report for 2010-11 elaborated on the paradigm shift in domestic textile and textile-related industries, towards branding and designing, which is supported by mass-media campaigns and changing consumer preferences. Almost all the income groups have increased their expenditures on apparel; however, once again, it has been the upper and upper-middle income brackets that have led this increase. 4.3 Investment Investments continued to taper for the fourth consecutive year after the crisis of 2008. In FY12, the investment-to-GDP ratio reached 12.5 percent, which is the lowest amongst major Asian countries ( Figure 4.3 ). Presently,  both domestic as well as foreign investment is weak due to an unfavorable investment climate, characterized by idle capacities; security concerns; energy shortages; low public investments; unfocused trade policies; and governance issues ( Figure 4.4 ). FY12 was also the fourth consecutive year that saw a decline in FDI. Here it is important to mention that FDI has bounced back in a number of emerging and transition economies to surpass the pre-crisis average; 14  but in Pakistan, it is still waning (see Chapter 8 ). Low capacity utilization During FY12, most large-scale manufacturing units utilized less than 50 percent of capacity ( Table 4.2 ). Energy constraints and law and order conditions, are the most frequently cited factors in explaining this trend, especially in fertilizer, steel and glass. However, there are other explanations as well. 13  The increase in fixed investment loans for animal farming and feeding, grains milling products, processing of food & vegetables, manufacturing of beverage, and dairy products, etc., during FY12, supports this view. 14  3-year average level for 2005-2007. Source: UNCTAD World Investment Report 2012. 012345OverallFoodApparelEducationFuel and lighting     p    e    r    c    e    n     t FY02-07FY08-11 Figure 4.1.2: Change in Real Consumption of Urban Households for Selected Commodity Groups (CAGR)Source : HIES, Pakistan Bureau of Statistics -20 -15 -10-50 5 10 FY08FY09FY10FY11FY12      p     e     r     c     e     n      t ForeignDomesticTotal Figure 4.4:Composition of Investment GrowthSource : Pakistan Bureau of Statistics, SBP 01020304050ChinaSri LankaIndiaBangladeshPakistan     p    e    r    c    e    n     t Source : World Bank databank. Figure 4.3: Investment-to-GDP Ratioin Regional Countries (2011)
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