GDP growth pinned on industrial sector

With the energy crisis having gripped the entire nation earlier than it usually does, the State Bank of Pakistan, in its State of the Economy Report for the second quarter of FY13 has singled out the industrial sector, the key to economic growth for the remaining fiscal year. The Central Bank has maintained its stance that the country is likely to miss the target of 4.3 percent real GDP growth.
The SBP expects the economy to grow by 3.5 to 4 percent, with a change in growth composition from agriculture to the industrial sector. Pakistan is all set to miss the agricultural growth target of 4 percent for FY13 by some margin as all major crops barring sugar cane are expected to register sizeable decline for one reason or another.
Despite the recent increase in wheat support prices, the wheat crop, which is critical to the country’s food security and inflation, is likely to miss the target. Cotton, another vital crop, is all set to face a sizeable 8 percent dip in FY13, which could have a telling impact on export earnings going forward. The only silver lining among the major crops is the sugar cane crop, which would help earn export dollars and boost the LSM sector in the remaining half of the fiscal year.
The LSM sector has posted significant improvement in the second quarter, mainly on account of increased capacities. Steel, rubber and petroleum refinery industries posted increased production on account of improved fuel efficiencies and capacity enhancement. With the advent of Pakistan’s largest refinery, the sector’s production is likely to go up by 48 percent, but that would depend on a number of factors, of which the circular debt situation is most vital.
There is very little that suggests resolution of energy crisis anytime soon, and circular debt resolution seems far off. The ADB in its earlier reports on Pakistan has mentioned the country’s economic growth to face continuous pressure on account of energy crisis – in the tune of percent of the GDP. With agriculture growth target to be missed almost certainly, resting high hopes on industrial sector performance in times of such acute energy crisis may backfire.
On the financial sector front, banking sector underwent decline in profits in the 1HFY13. The spreads have shrunk, as the interest rates are down to single digits. The economic activity has not picked up despite low interest rates. The law-and-order and energy situation will continue to be the key determinants of a surge in banks’ credit to the private sector. The likelihood of any improvement on these accounts is remote, as the caretaker set-up is unlikely to take up any major strategic decisions.