Tuesday, 9 September 2014

Losing the plot

Article was published in money matters on monday 8 sep 2014

Gross Domestic Product (GDP) is the measure of recording all the economic activities during a specific period of time. The time period varies from a month to quarter or annual. Although the Pakistan Bureau of Statistics tries its best to measure the GDP by including informal sectors but still large part of the economy is unrecorded.

Protests in the form of long marches, sit-in and strikes affect the economy in various ways. Strike in a city affects the economic activity based on the number of days it is called for. In general, a one day strike does not affect the economic activity of entire country unless other cities are dependent on it.

For example, a strike in Karachi also affects other cities as well as the stock market because it is the commercial capital of the country. Interestingly, one day strikes call are, in general for half a day and in the second half of that day, economic activity may mitigate the effect of loss from the first half of the day.

Nevertheless, transport business as well as banking and financial market and manufacturing sector may not mitigate the effect of half day strike, thus contributing to loss.

Long marches, on the other hand, do not decrease the economic activity, in-fact it may increase the economic activity because the participants get breakfast, lunch, and dinner. Moreover, it also uses banners, flags, music system and placards.

Sit-in is a special kind of protest in which economy may not suffer at all. Nonetheless, if it happens in every city or major area of the city then it may affect the overall economic activity.

Government has significant role in mitigating and/or aggravating the economic loss during protests. Economics loss varies accordingly if the government provides safe passage to the protestors or government create hurdle for the protestors.

Although there are other types of protests as well but objective of today’s piece is to discuss the economic loss due to current protest by PTI and PAT and role of government in it.

Different articles in various newspapers discussed the extent of loss that the economy has faced. Among them the most discussed and most significant was loss in the market capitalization due to crash in the stock market because market situation was very vulnerable. Nonetheless, if stock market bounces back to the same level in few days then loss due to market capitalization will be lessened. However, at micro level people who lost everything during the three weeks may not come to same welfare level which they were enjoying before the protest started. Similarly, people who invest/divest to earn for their living daily meal be harmed during the crisis.

Another important loss mentioned was increase in external debt in rupees due to depreciation in exchange rate. The onus is not only the protest but since it is the significant event affecting both exports as well as imports, therefore, the onus of the depreciation is associated to the protest.

Although the above two mentioned issues are big in monetary terms but they are not affecting too many people. There are several other sectors which are directly or indirectly affected by the protest. At first, the protest has started from Lahore and the Government put containers everywhere to block their marches and restrict people to join them. The containers were taken by force to block roads and protect important national and international buildings/offices. Each container costs Rs.20, 000 to 1.5 lakhs per day depending on the size of the container and overhead cost including security and insurance paid on it.

Moreover, the crane, which is used to place the containers at certain places cost Rs.10, 000 per container but it may vary if used it in bulk. We can assume that since government has its own machinery therefore, it may have not cost them a penny but when government will return the containers to their owners, the owner will incur the cost.

It is worth mentioning here that the price of each container is in millions. It varies from Rs.1 million to Rs.5 million. If some containers are damaged or lost then there is a good amount price owners need to pay.

We have already seen “bhangras” after throwing/removing the container, which definitely ruin the containers from inside as well as outside.

It is wrong to assume that containers were empty. Some containers were filled with luggage which was paid by the traders. In the end, trader bears the cost of the material in it, unless they find it safe inside the container if they get it.

Contractual workers in construction sector and workers used for loading and unloading are the most affected people because if there is no business they will not be hired for work. However, it is also believed that the contractual workers are then going to these protests to feed themselves. Therefore we cannot say unambiguously that welfare level of contractual workers will be reduces but it is clear that economic activity of that sector in which they work is reduced.

Services sectors especially situated in the vicinity of protest are the most critical to address. While the sit-in was at the Aabpara market, sale of perishable items such as bread, eggs, halwa, puri, milk, tea, cold drinks have increased, while sale of clothing and other household non-food items has decreased.

When sit-in moved into the red-zone area, social welfare organizations are bringing in food items for protestors and some protestors are going out to eat as well. This implies that sale of tea stalls may have gone down but sale of clothing and other non-food items may have gone up. Nevertheless, due to insecurity customers are not visiting markets very often thus the sales of Aabpara market is definitely low. Similar to Aabpara market, businesses at other markets has also reduced.

Although the main sit-in or protest is taking place in Islamabad but few days ago it has started in other cities as well. Since supply chain of all the retail market is wholesale market, therefore, I asked a wholesaler in Lahore about his business during August. He told me exaggerating figure, i.e., sale of his products gone down to less than 10 percent of total sales compared to normal days. To lessen the extent of exaggeration if we say 20 percent, even then it implies that during the protest the sales have reduced to one-fifth of total sales, which is a big loss to the entire business community. This kind of loss cannot be covered afterwards.

Restaurants are also not getting enough customers. Since offices, schools and shops are closed transport sector is also bearing loss. Similarly, drivers and ticket checkers who are on daily wage are severely affected. Business persons, who have offices in blue area and other markets, by the end of the month, need to pay rent of office and salaries to their permanent employees irrespective of whether they get business in the last month or not.

Government offices are closed. Projects, which have already started by the government, will be delayed if they do not get proper funding at proper time which will increase the cost of each project.

From the above discussion we may conclude that traders are bearing huge amount of money due to forced hoarding of their containers. Moreover, since people are not spending therefore, their savings may have increased. Similarly, government offices are closed, which implies lesser expenses in terms of electricity etc. But overall we cannot say that it is benefitting the economy. The loss of economic activity per day is large but cannot be in billions. It would be interesting to see that if the process of calculating GDP ignores these losses, if they do, the sit-ins, may not impact the overall recorded GDP at all.
- See more at: http://magazine.thenews.com.pk/mag/moneymatter_detail.asp?id=8884&magId=10&catId=171#sthash.PkA18XDo.dpuf

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