Consumption a Mainstay of Economic Activity

Posted by alice hall on February 20th, 2020

Economic activity in a regular economic cycle is mainly driven by consumption, spending, and investment. Consumption especially is a lubricant that oils the wheel of this economic cycle and makes it revolve efficiently.

One of the weaknesses of our economy is lack of spending and propensity to consume. This is because the high inflation and low per capita income which is around 000 makes the case for a lower consumption. Since the shrinkage of output levels results in lower employment levels and thus lower spending/consumption. The current situation is that the investment is LSM (Large Scale in Manufacturing) is showing a decreasing trend evidencing a reduced manufacturing activity. This will impact the output and ultimately GDP growth adversely and hence the hampered economic growth.

In the global economic scene. Unfortunately, synthetic means are adopted to achieve the objective of consumption enhancement. Rather than let it attain scale organically. This has resulted in a global debt of 8tn which is 226% of global GDP. This is a perilous situation as normal tools such as interest rates are not largely effective in this scenario. As deleveraging is difficult to achieve even if the rates are lowered to the maximum. And this is what is happening. The rates globally, especially in Eurozone and USA are either negative or are very low.

In Pakistan the scenario is a bit different. Here the interest rate environment is pretty tight i.e. the rates are on the higher sides. So, the economy in this case in skewed towards the lower end of its cycle. This environment is not suitable for investment and capital formation, since it curbs and strangulates the inherent process and flow of capital formation. To attain a genuine growth, both monetary tools and fiscal stimulus should be adopted. The heartening fact is the current account deficit has been narrowed by 73% in comparison to the same period last year. And lower import bill and higher export performance has also contributed to this positive trend.

So, this will alleviate the stress from the fiscal deficit also, as borrowing requirements of the government will come down, and hence the reduced debt servicing. This will in turn will impact fiscal deficit positively. And will substantiate government’s power to increase public spending. Along with this if the government is able to widen the tax net, it will further boost and narrow the fiscal deficit.

This is one aspect. On the other hand if rates are lowered considerably. It will encourage lending by banks mainly to private sector. Giving boost to investment. Which will nudge the economic cycle in the direction of well sought after crest. As investments are directly proportional to increase in output and thus the GDP.