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Pakistan’s economy shrinks to $341.5bn: Economic Survey

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Pakistan's economy shrinks to $341.5bn: Economic Survey

Size of Pakistan’s economy – Gross Domestic Product (GDP) – shrank by $34 billion during the outgoing fiscal year, as its overall size dipped to $341.50bn when compared with the level of $375.4bn in 2021-22.

According to the Pakistan Economic Survey 2022-23 which would be released tomorrow (Thursday), it translated into a $198 reduction in per capita income which plunged to $1,568 against $1,766 recorded last financial year.

But the depreciation in rupee against the US dollar meant the overall volume of economy increased in terms of local currency, reaching Rs84,760bn after an increase of Rs10,678bn. It means the per capita income – in terms of rupee – also jumped to Rs388,775 in 2022-23 when compared with Rs313,337 recorded last year.

However, this spike in terms of Pakistani rupee is meaningless for the people as the rising cost of living and the resultant reduced purchasing power triggered by the record-high inflation meant that they were emptying their pockets much quicker than previous years. In fact, meeting the basic needs like food has become a challenge for many.

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The document cites the ongoing Ukraine-Russia war as the main reason behind the high cereals prices in world markets, which has triggered an inflationary cycle; as a result, Pakistan witnessed 29 per cent inflation during July-March period.

The Pakistan Economic Survey is a year-ending document which is released every year a day before the presenting the federal budget. It contains official final figures for the first nine months [July-March] and provisional estimates related to the last quarter [April-June] which are finalised later.

Read more: WB projects two more dark years for Pakistan’s economic growth

With the National Economic Council (NEC) approving a GDP growth rate of 0.4pc for 2022-23 and setting a target of 3.5pc for 2023-24, one can easily notice Pakistan’s inability to maintain or increase a growth rate that can meet the national needs amid a high population growth rate.

In 2017-18, the growth rate was 6.1pc which dipped to -0.94 in 2019-20. However, it witnessed a jump by 5.77pc but only after the then PTI government decided to rebase the economy. Previously, the year 2005-06 was used as a base but it was changed to 2015-16, thus benefitting, in terms of figures, from the high growth rate witnessed during the PML-N government.

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This rebasing of economy did certainly improve the GDP numbers but only hid the reality, thus the critics describing the move as just a political gimmick. So the economy’s size actually shrank alarmingly from the level of $357bn in 2017-18 to $301bn in 2019-20.

It surpassed the 2017-18 level only once in 2021-22 by just $18bn to $375bn but again witnessed a decline to the level of $341.50bn this fiscal year.

The document showed that the services sector had the largest share in national economy which stood at 54pc followed by agriculture 24pc and industry 22pc.

To understand why Pakistan couldn’t achieve a sustainable and stable economy while spending a huge sum on importing food items is best illustrated by a dismal agriculture sector growth rate which ranged between 3.88pc in 2017-18 and 1.55pc in 2022-23 with an exception of 2021-22 when it surpassed the 4pc mark.

On the other hand, the manufacturing sector witnessed negative growth in twice during the last six years – -7.8 in 2019-20 and -3.91 2022-23.

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These examples from the agriculture and manufacturing sectors show that Pakistan has been left with very little room to earn much-needed foreign reserves through exports. Same applies to the services sector.

But the political pressure we are facing today is perhaps best explained by a huge budget deficit – an issue that is also responsible for the harsh conditions set by the International Monetary Fund (IMF).

Hence, the easiest solution proposed by the country’s policymakers and the quickest remedy coming from the international experts is hiking the gas, electricity and fuel prices which leads us to the inflationary cycle we are witnessing.

Read more: IMF official says Pakistan must explain fuel-pricing scheme before any loan deal

In 2017-18, the budget deficit was recorded at Rs2,260bn but it swelled to Rs5,260 in 2021-22. This huge gap meant that Pakistan became more dependent to foreign assistance and influence, as explained by the ongoing IMF saga.

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However, there has been a marked reduction to the level of Rs3,079 during the first nine months of the current fiscal year due to the measures taken by the coalition government.

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SBP categorically denies reports about issuance of plastic banknotes

SBP categorically denies reports about issuance of plastic banknotes

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The State Bank of Pakistan (SBP) has rejected the reports regarding issuance of polymer (plastic) notes as baseless and without substance. There is no such plan or suggestion currently under consideration regarding change in the substrate of banknotes from paper to the polymer, the central bank said in a statement. “SBP uses cotton based paper substrate which is manufactured locally by the Security Papers Limited, using primarily local raw materials,” it said. The response comes a day after various news portals claimed that SBP was planning to replace the paper currency with plastic banknotes to prevent fake currency in the country.

The State Bank of Pakistan (SBP) has rejected the reports regarding issuance of polymer (plastic) notes as baseless and without substance.

There is no such plan or suggestion currently under consideration regarding change in the substrate of banknotes from paper to the polymer, the central bank said in a statement.

“SBP uses cotton based paper substrate which is manufactured locally by the Security Papers Limited, using primarily local raw materials,” it said.

The response comes a day after various news portals claimed that SBP was planning to replace the paper currency with plastic banknotes to prevent fake currency in the country.

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Bank of Japan leaning toward exiting negative rates

Bank of Japan leaning toward exiting negative rates

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Bank of Japan leaning toward exiting negative rates

A growing number of Bank of Japan policymakers are warming to the idea of ending negative interest rates this month on expectations of hefty pay hikes in this year’s annual wage negotiations, four sources familiar with its thinking said.

Upon ending negative rates, the central bank is also likely to overhaul its massive stimulus programme that consists of a bond yield control and purchases of riskier assets, they said.

But an imminent shift is a close call as there is no consensus within the nine-member board on whether to pull the trigger at its upcoming March 18-19 meeting, or hold off at least until the subsequent meeting on April 25-26, they say.

Many BOJ policymakers are closely watching the outcome of big firms’ annual wage negotiations with unions on March 13, and the first survey results to be released by labour umbrella Rengo on March 15, to determine how soon to phase out their massive stimulus.

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Significant pay hikes will likely heighten the chance of action in March, as the offers by big firms usually set the tone for those by smaller firms nationwide, the sources said on condition of anonymity due to the sensitivity of the matter.

The BOJ hopes that solid wage increases will coax consumers to spend more, boosting demand and prices after years of economic stagnation and deflation.

“If the spring wage negotiation outcome is strong, the BOJ may not necessarily need to wait until April,” one of the sources said, a view echoed by another source.

But the BOJ may hold off until April if many board members prefer to wait for next month’s “tankan” business sentiment survey and the bank’s regional branch managers’ report on the nationwide wage outlook, before making a final decision, they said.

The yen has been rising against the dollar on growing speculation that the BOJ could end negative rates soon, and bets of imminent rate cuts by the U.S. Federal Reserve. It rose to 146.95 to the dollar on Friday, its highest level since early February.

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WEAK DATA A RISK

The BOJ has long targeted inflation at 2% and has guided short-term rates at -0.1% and the 10-year bond yield around 0% under a policy dubbed yield curve control (YCC).

With inflation exceeding the target for well over a year and prospects for sustained wage gains heightening, many market players expect the central bank to end its negative interest rate policy this month or in April.

Upon pulling short-term rates out of negative territory, the central bank is likely to ditch its 10-year bond yield target, the sources said.

To avoid an abrupt spike in long-term rates, the BOJ will likely commit to intervening in the market when needed to stem sharp rises, or offer guidance on the amount of government bonds it will keep buying, they said.

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Japan’s Jiji news agency reported on Friday the BOJ is considering replacing YCC with a new quantitative framework that will show in advance how much bonds it will buy in the future.

Prospects of continued solid wage growth, driven by rising living costs and an intensifying labour shortage, have heightened momentum for an end to negative rates in March.

Japan’s largest trade union group Rengo said on Thursday average wage hike demands hit 5.85% for this year, topping 5% for the first time in 30 years.

BOJ board member Naoki Tamura, a former commercial bank executive, has been the most vocal advocate of an early exit from negative rates, signalling in August last year that the bank could take such action by March 2024.

Fellow board member Hajime Takata also called for an overhaul of the BOJ’s stimulus programme last week, saying that Japan was finally seeing prospects for durably achieving the bank’s inflation target.

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If a majority of the nine-member board vote in favour of ending negative rates, it would pave the way for Japan’s first rate hike since 2007.

But there is uncertainty on whether any proposal to end negative rates in March would gain enough votes, as some board members may feel cautious about exiting amid recent weak signs in consumption and the broader economy.

Preliminary data suggested Japan’s economy slipped into recession in the fourth quarter due to weak domestic demand, though more recent readings pointed to stronger capital expenditure that will likely lead to an upgrade when revised gross domestic product figures are published on March 11.

Household spending also dropped 2.5% in December from a year earlier, extending its decline for a 10th month, due to supply disruptions of cars and continued declines in real wages.

Board member Seiji Adachi has said it might take until after the April 2024 start of the next fiscal year to determine whether conditions are conducive to ending negative rates.

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Two other members, Toyoaki Nakamura and Asahi Noguchi, have also voiced caution over a premature withdrawal of monetary support.
Sources have told Reuters earlier that the BOJ will downgrade its assessment on consumption and output, nodding to recent weak signs in the economy. 

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Singapore’s PCG to reopen fund for luxury Japan ski resort

Singapore’s PCG to reopen fund for luxury Japan ski resort

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Singapore's PCG to reopen fund for luxury Japan ski resort

Patience Capital Group, the Singapore-based investor behind a $1.42 billion luxury ski project in northern Japan, is in talks to reopen its fund to new investors eager to get in before tightening by the Bank of Japan.

PCG’s initial 35 billion yen ($237 million) fund, announced last year to transform Myoko Kogen in Japan’s Niigata prefecture into a winter sports destination at par with Aspen and Whistler, may grow to 60 billion yen as new money from domestic and foreign investors piles in, said PCG founder Ken Chan.

Japan is riding twin booms in investment and inbound visitors, boosted by a weak yen that makes the country a bargain for foreigners. Chan set up PCG in 2019 to benefit from both, investing in accommodation and resort properties.

The BOJ is expected to move as early as next week, beginning a lengthy normalisation from about two decades of easy money policy. That shift, along with possible interest rate cuts by the Federal Reserve, is likely to drive the yen up from the near three-decade lows it trades at now, Chan said.

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“It’s clear from a macro perspective, this year is a very important year to put funds into yen assets because the yen is too cheap right now,” said Chan, who founded PCG after 19 years with Singapore’s GIC sovereign wealth fund, where he acted as its Japan head.

“I think in the next few months, you will continue to see investors coming in to take an investment position in this market,” he added.

Chan, who was born in Japan and spent his early childhood there, last year sketched out a plan to turn the Myoko Kogen area into a high-end winter paradise that can attract wealthy, globe-trotting snow fans.

His fund, which caters to institutional and high-net-worth investors, has bought about 350 hectares of land which includes two existing ski slopes.

Chan is also working with the Tokyu group, which owns the nearby Madarao Tangram resort, to manage the mountain there as one operation. He added that if any resorts in the vicinity were willing to sell, PCG would be happy to consider taking them over.

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Although the full build-out will take about a decade, Chan aims to have the first two luxury hotels ready by 2028. That is a year later than originally planned due to a major earthquake on the Noto peninsula on Jan. 1 that has pulled away construction resources.

PCG expects to raise money for the project in two additional funds around 35 billion yen size, with the spending power of all funds doubled through borrowing leverage.

Total spending is still benchmarked at the 210 billion yen level, but it could “absolutely go beyond (that figure) because there’s so much land waiting to be developed,” Chan said.

LABOUR CRUNCH

Although Japan enjoys annual dumps of some of the best powder snow in the world, much of the nation’s ski industry is suffering from aging infrastructure and a shrinking base of domestic customers.

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The number of Japanese skiers and snowboarders fell by about 75% from its peak in 1998 as of 2022, according to the Japan Productivity Centre. Global warming has also led to less snow in all but the most northern parts of the country, leading to seven ski resort bankruptcies in 2023.

Myoko is about 200 km (125 miles) northwest of Tokyo, and cold winds coming off the Sea of Japan produce some of the deepest snow in the world. But the area has so far missed out on the attention and investment seen in nearby Hakuba or Niseko on Japan’s northernmost island of Hokkaido.

Another hurdle for PCG or any other would-be developer is Japan’s tight labour market. The retail and hospitality sectors have not recovered from an exodus of workers during the pandemic. Skilled, multi-lingual staff needed by high-end resorts is in short supply.

Chan hopes to solve that problem by building dormitories and housing in the Myoko area and making it an attractive township that will draw in foreign and domestic workers through multiple seasons.

“The local, liveable area is something that we need to address right from the beginning,” he said. 

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