Economic Survey 2011-12: GDP growth estimated at 3.7pc

MUSHTAQ GHUMMAN

ISLAMABAD: The country’s economic survey 2011-12 has estimated 3.7 percent GDP growth against the target of 4.2 per cent and actual growth of 3 per cent in 2010-11.

According to official Economic Survey to be released on Thursday (tomorrow) one day before the federal budget 2012-13, the government has projected GDP growth at 4.2 percent on the back of projected 3.4 percent growth in agriculture, 3.1 percent in industry, and 5.0 percent in services sectors.

Well -informed sources told Business Recorder that the chapter on poverty is yet to be finalised as Planning Commission and Finance Division have different statistics of poverty. The incidence of poverty, according to independent analysts, has increased substantially. 

The document reveals that agriculture sector is estimated to grow by 3.1 percent as against the target of 3.4 percent as rains impacted that sector badly in lower Sindh but a good harvest in Punjab has more than offset the damages to major crops.

Industrial sector particularly remained confronted with gas and electricity outages and is expected to grow by 3.4 percent.

The services sector grew by 4.0 percent, which is below the targeted growth of 5 percent and actua1 growth of 4.5 percent for last year.

Foreign direct investment (FDI) has touched its lowest ebb in almost one decade during the first nine months (July-March 2011-12), which constrained economic activity in the country.

The following are the details of Economic Survey: 

Agriculture: Agriculture sector shows a 3.1 percent growth against the target of 3.4 percent. The major crop sector witnessed a turnaround as three of the four major crops posted a positive growth. The outturn of the cotton crop in Punjab compensated the losses in cotton crop in Sindh province. The productivity gains in the wheat crop achieved during the last year could not persist in 2011-12 and further area sown also declined by 2.6 percent, leading to a 6.7 percent fall in wheat output. The rice crop recovered from very low production of last year at 4.8 million tons to 6.2 million tons. The sugarcane production benefited from water availability and is estimated at 58.0 million tons as against 55.3 million tons achieved last year. Minor crops depicted a mixed performance with contraction in the output by 1.3 percent as against the target of 2 percent expansion and last year’s actual growth of 2.7 percent. The livestock sector benefited from rising price incentive and converges to historical growth of 4.0 percent. Agricultural credit disbursement by banks surged by 17 percent on year-on-year basis to Rs.197.4 billion in the first nine months (July-March 2011-12).

Manufacturing: Overall, manufacturing sector recorded a 3.6 percent growth against the target of 3 .7 percent and actual outcome of 3.1 percent last year. The Large-scale manufacturing remained confronted with energy outages and unfavorable investment climate. Large-scale manufacturing expanded by a modest 1.8 percent during 2011-12 against the target of 2 percent compared to 1.2 percent growth of last year, improved performance in sugar, cement, pharmaceutical and leather products along with strong rural demand for fertilizers and small farm implements also played role in positive growth in the LSM.

Services sector: Services sector has helped growth reach close to the target as it grew by 4.0 percent against the target of 5 percent. The finance and insurance sector witnessed 6.5 percent growth as against expected growth of 0.2 percent and last year’s contraction of -1.4 percent. The other contributor was the sub-sector social, community and personal services which depicted good growth of 6.8 percent in line with last year’s actual growth of 6.9 percent. Barring these two, all other sectors depicted a modest growth. Wholesale and retail trade sector has shown a satisfactory growth of 3.6 percent which is though below the target of 5 percent and slightly higher than last year’s actual growth of 3.5 percent.

Savings and Investment: National saving is estimated to fall from 13.2 percent of GDP to 10.8 percent in 2011-12 as against the target of 13.2 percent. Real private investment fell by 13.0 percent while public investment fell by 8.4 percent. The investment is already at its lowest ebb and a further reduction in investment level will impede growth prospects of the economy. During July-February, private businesses borrowed Rs.57 billion, of which Rs 52 billion were borrowed for working capital requirements. However, only Rs 5 billion were directed to the fixed investment sector.

Foreign Direct Investment (FDI) fell by 48.2 percent during July-March 2011-12 and stood at $ 599 million as against $1157 million in the comparable period of last year. The portfolio investment decreased by 148.5 percent as it turned into an outflow of $ 83 million against an inflow of $ 305 million in the corresponding period of last year. Major sectors attracting FDI include oil and gas exploration ($428.9 million), chemicals ($66.9 million), financial businesses ($45.6 million), and construction ($53.3 million).

Fiscal Developments: The government took various measures in budget 2011-12 to boost economic activity and achieve fiscal consolidation. The fiscal strategy was aimed at expanding the resource envelope by tapping “tax buoyancy” and by containing the current expenditure. The fiscal deficit was targeted at Rs 851 billion (4 percent of GDP). The consolidated revenues during 2011-12 has been budgeted at Rs 2,870 billion with tax revenues at Rs 2,151 billion and non-tax revenues at Rs 719 billion. Similarly, consolidated expenditure has been budgeted at Rs 3,721.1 billion with current expenditure of Rs 2,976 billion and development expenditure including net lending at Rs 744.9 billion.

On the expenditure side, Finance Ministry has acknowledged that some slippages were witnessed on account of subsidies. On the development side, the government has maintained the PSDP at Rs.300 billion by cutting rupee allocations to accommodate higher than budgeted foreign aid inflows. The fiscal deficit has reached 4.3 percent of GDP during July-March 2011-12 after excluding one-off debt consolidation worth Rs.391 billion. Overall fiscal deficit is expected to surpass the target.

FBR Tax Collection: Tax collection by FBR stood at Rs.1426 billion during July-April 2011-12 as against Rs.1149.8 billion collected in the comparable period of last year. This implies that net tax collection is up by 24 percent and it has achieved 73 percent of full year target of Rs.1952.3 billion for 2011-12.

Monetary Developments: SBP in its monetary policy statement of July 2011 envisaged monetary expansion (M2) to grow by 15.5 percent for 2011-12. Encouraged by some positive developments on inflationary developments, the State Bank of Pakistan (SBP) took an important decision of reduction in the policy rate for revival of private sector investment in the economy and provided much needed support to economic growth. The SBP reduced its policy made by 200 basis points (bps) from 14.0 percent to 12 percent in first half of 2011-12 (a reduction of 50 bps in July 2011 and 150 bps in October 2011). The decision was taken for not letting real interest rate goes up to suffocate growth. In order to enhance operational independence of SBP, the State Bank of Pakistan (Amendment) Act (2012) was passed by the parliament in which important decisions were taken regarding putting restraint on the government borrowing and encourage private savings.

The main impetus for monetary expansion of 8.7 percent came from extraordinary surge in government borrowing from the banking sector in the July 1 to May 4, 2011-12. Contraction of Rs.261 billion in Net Foreign Assets (NFA) of the banking system is witnessed in the first ten months of the current fiscal year as against expansion of Rs.174 billion in the comparable period of last year. The contraction was mainly due to lower external inflows and higher current account deficit. Strong credit need of the government for budgetary support is witnessed which has resulted into a 14.3 percent growth in NDA of the banking system. Without forex purchase by SBP and mop-up of rupee liquidity, NDA to NFA ratio has deteriorated (increased), which does not bode well for inflation. Credit to private sector has increased to Rs 251.5 billion in this period compared to Rs.112.6 billion in the same period of last year. However, despite a moderate aggregate demand, pressure on rupee liquidity is likely to continue due to uncertain foreign inflows and substantial government borrowing to finance the fiscal deficit. SBP kept a vigil on liquidity situation and through open market operations provided liquidity which is evident from rise in credit to the private sector.

Inflation: CPI inflation was targeted at 12 percent for 2011-12 and it has increased by 10.8 percent during July-April 2011-12, compared to 13.8 percent in the comparable period of last year. Wholesale Price Index (WPI) and Sensitive Price Index (SPI) escalated by 11.2 percent and 8.5 percent, respectively during July-April 2011-12 against 21.0 percent and 18.1 percent in the same period of previous year. The core inflation has shown a rising trend and increased by 10.4 percent as against 9.3 percent in the comparable period of last year.

Balance of Payments: Current account deficit was targeted at $1.4 billion or 0.6 percent of GDP. However, slowdown in exports and imports was anticipated but falling global demand export target was set at $ 25.8 billion and imports at $38 billion. However, domestic economic activity changed the entire scenario.

Balance of Trade: Trade deficit was envisaged at $12.2 billion or 5.3 percent of GDP in the annual plan. However, it has already touched $11.6 billion during July-March 2011-12. The deterioration is mainly coming from higher than anticipated import growth and lower than expected export growth. It is all set to surpass the target by a fair margin.

Exports: During July-March 2011-12, exports inched up by 2.4 percent to $18.3 billion as against $17.9 billion in the corresponding period of last year. The worrying aspect is a fall in quantum terms. The textile sector witnessed both quantum and value fall. There was a surge in unit value of food items like rice, fruits etc. Major contribution to increase in export growth came from non-traditional items like chemicals, engineering goods and edibles. Textile exports contracted by almost $1 billion and this loss is mitigated by $825 million increase in nontraditional exports. Exports categories witnessing a negative growth include food (5.1%), textile (9.4%) and petroleum (27 percent). Unit value of exports indices suggests that price is still helping Pakistan’s exports but there is a need to review supply side of exports to enhance generation of exportable surplus.

Imports: During July-March 2011-12, imports surged by 14.9 percent to $ 29.9 billion as against $26.0 billion in the corresponding period of last year. Almost 62 percent of import growth is contributed by petroleum group and another 20 percent by agricultural chemicals including fertilizer. Negative contributions came from food, transport and textile groups. The current surge in imports is worrying as quantum index of imports went up by 1.7 percent and the rest is contributed by recent spike in crude oil prices. Imports in absolute terms went up by $3.9 billion. POL imports alone contributed $3.0 billion, followed by edible oil ($325 million) and fertilizer ($427 million). This implies that imports growth is driven by simply these three items.

Workers’ Remittances: The buoyancy in remittances continued during July-March 2011-12 grew by 21.5 percent to $9.7 billion compared to $6.1 billion last year. The average monthly remittance inflow stood at $1 .1 billion as against $870 million last year. Given the current trend, the expectations are that remittances will surpass the target of $12 billion. The upswing in remittances for some years is mainly driven by formalization of informal flows through incentivizing formal channels through Pakistan Remittance Initiatives (PRI). The Middle East remained the major driver of remittance inflow.

The current account deficit widened to $ 3.1 billion in July-March 2011-12. The entire contribution to this surge came from trade imbalance which stood at $11.6 billion as against $8.2 billion in the corresponding period of last year. The services exports have contracted by 16.8 percent to $ 3.7 billion in July-March 2011-12 from $ 4.4 billion in the comparable period of last year. In this period, services imports increased by 5.9 percent to $5.8 billion. This resulted in a deficit of $ 2.1 billion on services account. The fall in exports of services is mainly due to non-availability of funds under Coalition Support Fund (CSF).

The external account position is further compounded by lower inflows in capital and financing account, thereby resulting in Gross foreign exchange reserves to deplete by $2.8 billion to $13.2 billion by end-March 2012. This depletion is also reflected in Pak rupee-US dollar parity which lost 4.8 percent of its value in nine months. The average exchange rate for the month of March 2012 was Rs.90.71 to a dollar. Real Effective Exchange Rate (REER) on the other hand has appreciated by almost 1.8 percent.

Due to lower inflows in the capital and financial account to finance burgeoning current account deficit, the surplus in the capital and financial accounts deteriorated to $ 976 million as compared to $1796 million in the same period of last year. The deterioration is more pronounced in non-debt creating inflows like foreign direct investment (FDI) as compared to debt creating inflows. All these developments translate into an overall balance of payments deficit of $2.7 billion in the first nine-months with implications for depletion of foreign exchange reserves.

Considering current trends and assuming no major shock in international oil and other key commodity prices, for 2011-12, growth in imports and exports are projected at 1.2 percent and 11.5 percent, respectively. Workers’ remittances are expected to remain close to $12 billion. These projections translate into a current account deficit of around $4.3 billion (or 1.8 percent of GDP). Total capital and financial inflows during the year are projected at around $3.3 billion, which implies an overall balance of payment deficit of $2.1 billion. Furthermore, due to expected IMF loan repayment worth $1.1 billion with zero net forex purchases, SBP net reserves are projected to decrease by around $2 billion by end-June 2012.