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ISLAMABAD: A meeting of the National Economic Council (NEC) is likely to review and approve the economic performance of the current fiscal year and will target growth for the next fiscal year based on the development outlay for the next fiscal year.

An official said that the Ministry of Planning and Development Monday gave a presentation to the prime minister on the Rs800 billion PSDP approved by the Annual Plan Coordination Committee Saturday.

Sources said that the NEC is expected to be given a briefing on the economic performance of the ongoing fiscal year and propose a five percent GDP growth target for the next fiscal year as was approved by the APCC.

They added that the economy was expected to consolidate on the growth momentum generated in the fiscal year 2021 hence, the GDP of 4.8 per cent was envisaged for the fiscal year 2022 with respective contributions from agriculture (3.5 per cent), industry (6.5 per cent) and services (4.7 per cent).

This growth target was based upon the assumption that positive response to the fiscal and monetary stimulus packages will continue to provide impetus to the growth momentum including favourable weather conditions, vaccination drive to reach maximum population and easing of COVID-19 related restrictions before the end of the first half, managing current account deficit, consistent economic policies etc.

The growth supportive policies induced aggregate demand and demand pressures remained strong as reflected through the sale of durables, higher imports of consumables and credit uptick for the private sector. Credit to the private sector reached its highest ever level. Against this backdrop, the economy surpassed the envisaged target of 4.8 per cent (the target is on an old base so might not be truly comparable) with a wide margin and registered a strong growth of 5.97 per cent.

Rs800bn PSDP proposed for FY23, says planning minister

This growth was contributed by the agriculture sector (4.4 per cent), industry (7.2 per cent) and services sector (6.2 per cent) and all three sectors also surpassed their respective sectoral targets. However, there remained a question mark on the quality of economic growth as it is primarily driven by excessive demand-driven consumption.

The aggregate demand pressures remained strong as reflected through the sale of durables, higher imports of consumables and credit uptick for the private sector. Credit to the private sector reached its highest ever level. This increase in demand was mainly due to good financing terms offered by banks and rising incomes during the period.

Agriculture sector’s outturns exceeded its envisaged targets of 3.5 per cent and posted a growth of 4.4 per cent against the last year’s growth of 3.5 per cent. Sugarcane crop with 88.7 million tons’ production as opposed to 81 million tons for last fiscal year, rice 9.3 million tons against 7.4 million tons last year, and maize crops 10.6 million tons compared to 8.9 million tons achieved record production with an impressive increase in per acre yield. Although, cotton production remained below target during 2021-22, however, it was 17.9pc greater than the crop output of last year.

Keeping in view the almost seven per cent reduction in area under cultivation, the performance of the cotton crop is also impressive. Wheat yield was affected by urea availability and disruptions in irrigation water supply, an increase in rust prevalence and high temperatures in the last fortnight of March (heat wave).

The estimated production is less than the target as well as last year’s crop production - mainly due to a decrease in area and yield. The short supplies of fertilizers and irrigation water/less rains during Rabi 2021-22 are major factors which resulted in recent lower than target production of wheat which is 3.9 per cent lower than last year’s production. Livestock, forestry, and fishery subsectors posted growth of 3.3 per cent, 6.1 per cent, and 0.3 per cent, respectively.

Industrial sector was projected to grow by 6.5 per cent based on a large scale manufacturing (LSM) target of six per cent, construction 8.3 per cent and electricity and gas distribution 10.7 per cent.

The LSM sector has recorded a growth of 10.5 per cent during July-March 2022 as compared to 4.1 per cent over the corresponding period of the fiscal year 2021.Out of 22 groups, 17 groups contributed positively towards this growth while five groups recorded a decrease in their production during July-March 2022. The automobile sector has recorded an annual growth of 54.12 per cent during July-March 2022 mainly due to the high production of cars/jeeps, light commercial vehicles and trucks.

This increase in demand was mainly due to good financing terms offered by banks and rising incomes during the period and food products, textile, wearing apparels, iron and steel products and wood sectors are the other major contributors toward this growth whereas, the rubber products, electric equipment and pharmaceuticals adversely affected growth in LSM index.

Construction sector registered a growth of 3.1 per cent based upon the government initiative of Mera Pakistan Mera Ghar and the construction sector-related amnesty scheme. The electricity generation and gas distribution sub-sector grew by 7.9 per cent during the fiscal year 2022, while the growth in the mining and quarrying sub-sector contracted by 4.5 per cent. Major factors for the deceleration of growth in mining and quarrying sub-sector included a significant decrease in the production of limestone (-21.7 per cent) and marble.

Services sector’s performance is mostly dependent upon the performance of Commodity producing sectors. The Commodity producing sectors during 2021-22 grew by 5.7pc, therefore, the performance of dependent services has also posted higher outturns in wholesale & retail trade (10.04pc), transportation and storage (5.4pc) etc. Banking and Real Estate services grew by 4.9pc and 3.7pc, respectively. IT-related services posted momentous growth of 11.9pc, which is complemented by impressive IT exports (29pc growth) as well during 2021-22.

Overall growth in Services sector during 2021-22 remained 6.2pc - with major contributions from WRT (10.4pc), transport & storage (5.4pc), hotels & restaurants services (4.1pc), information & communication (11.9pc), finance & insurance (4.9pc), real estate services (3.7pc), public administration & social security (-1.2pc), education (8.7pc), health (2.3pc) and other private services (3.8pc). The investment-to-GDP ratio has increased from 14.6 per cent of GDP in 2020-21 to 15.1 per cent in 2021-22, owing mainly because of increase in public investment which inched up to 3.4 per cent of GDP in 2021-22 from 3.0 per cent last year and private investment stagnated at 10 per cent of GDP despite 20 per cent increase in nominal terms.

However, in real terms, private investment contracted marginally by 0.5 per cent, mainly due to a 25 per cent fall in investment related to the electricity and gas distribution sector. Private investment increased by 49 per cent in real terms in the construction sector because of an incentive package given by the government. Public sector investment inched up to, while private sector investment share in GDP remained stationary at 10 per cent level.

Credit offtake for fixed investment has increased by 135.7pc, while credit for working capital and trade finance has posted growth of 448pc during the July-March 2021-22. Startup activities in the country attracted unprecedented $350 million investment from the global markets during CY21, which reflects seizing of potential investment opportunities for the growing business enterprises. SECP has incorporated the highest number of companies in a calendar year by registering 5764 companies which is 48pc higher than 2020.

National Savings are expected to decline to 11.1 per cent of GDP in 2021-22 from 14.1 per cent in 2020-21. Pakistan’s reliance on external borrowing increased as investment needs were not being financed by national savings. The level of foreign saving is estimated to increase from 0.5pc in fiscal year 2021 to 4.1pc of GDP in 2021-22. Fiscal Development: Fiscal deficit has widened to four per cent of the GDP in July-March 2021-22 compared to three per cent of the GDP in the corresponding period.

The deficit primarily originated from expenditure side as total expenditure grew by unprecedented 27pc on the back of 58pc increase in overall development spending and the increase is spearheaded by the provincial governments where development expenditure nearly doubled over the previous year. Current expenditure of the Federal Government exploded by 21pc mainly because of arrears clearance of subsidy and extraordinary increase in grants.

Total expenditure increased by 1.2pc age points of GDP which is higher than the increase in fiscal deficit. Current expenditure increased by 1.5pc age points of GDP, of which 0.6pc age points came from an increase in grants and 0.5pc age points from increase in subsidy. Entire increase in the fiscal deficit is contributed by the additional subsidy and grants. Additional subsidy was budgeted to clear the outstanding amount of Rs135 billion of IPPs and Rs118 billion of the PHPL. Additional grants were because of increased size of Ehsaas program and special grants to the HEC.

Interest payments has, in fact, decreased from 3.8pc of GDP to 3.3pc while consolidated development expenditures registered a growth of 58pc during 9MFY22. Federal PSDP actually increased by 17pc but provincial ADPs increased by 86pc. Federal government deficit widened from 3.7pc last year to 4.9pc this year whereas overall, fiscal deficit increased to 4pc of GDP during July March 2021-22 as against 3pc in the comparable period of last year. Increase in provincial surplus from 0.7pc of GDP last year to 0.9pc has compensated some portion of increase in federal budget deficit. On the revenue side, the tax revenue of the federal government witnessed a hefty increase of 0.8pc age points of GDP, whereas, the provincial tax efforts remained at previous year level.

This is despite the fact that the government withdrew all its domestic taxes on important revenue sources such as levies on POL products. This has also impacted its performance in non-tax revenues side as well because petroleum development levy (PDL) witnessed 66 per cent fall in collection. The government tried to insulate the inflationary impact of the global price hike by an initially drastic reduction in sales tax and PDL and lately completely withdrew these taxes on domestic consumption. Import related taxes on POL products compensated loss to some extent.

Net revenue of the federal government has increased by 8.1pc whereas federal expenditures grew by 24.8pc in the first 3 quarters. FBR tax collections remained on track as they witnessed 28.4pc increase during July-May 2021-22. For achieving the revised target, the FBR will have to collect more than Rs750bn in June.

The FBR taxes that primarily originated from imports and taxes collected at import stage accounted for 47.5pc of all net collected taxes. Imports in the period are up by 44.3pc and taxes at import stage are up by 48.1pc. Direct taxes are up by 28.5pc in July-May 2021-22 but taxes collected on domestic economic activity are also up by14.6pc [Table-3]. Primary reason for the lower growth in domestic taxes is contraction of 13.3pc in sales taxes on domestic economic activity because of lowering and finally eliminating incidence of sales tax on POL products by the government to mitigate impact of rising prices of oil imports. Another area where the government took revenue hit is the palm oil where restricted domestic pass- pass-through of international prices kept domestic prices under check.

Money Supply (M2) growth has slowed down to 6.2pc during July 01, 2021-May 13, 2022 compared to 7.5pc in the same period of last year. The contributions of NFA dragged down this overall M2growth by 5.4 per points and the contribution of NDA stood at 11.7 percentage points with a growth of 12pc compared to 2.4pc last year.

NFA contraction is basically a reflection of overall balance of payments situation where depletion of forex reserves is reflected in contraction of NFA by 182.3pc whereas in the comparable period NFA increased by 198.4pc. Overall balance of payments was comfortably placed and current account deficit was just at $543 million last year which is reflected in forex reserves build-up. This FY22, the current account balance is totally reversed and thus reflected in contraction of NFA.

A positive development is that the growth in NDA is driven by expansion in credit to nongovernment sector which increased by 14.4pc as against 4.9pc in the comparable period of last year.

The claims on government, on the other hand, increased by 11.3pc compared to 4.9pc in the same period of last year. Requirements for budgetary support increased by 10.4pc against 4.3pc last year while private sector credit went up by 17pc compared to 6.1pc last year. Reserve money growth went up by 13.2pc as against 0.2pc last year. Reserve money is driven by tremendous growth of 18.3pc in claims on scheduled banks. Currency in circulation grew by 5.8pc which is slightly lower than last year’s growth of 6.5pc.

Inflationary pressures during 2021-22 remained elevated due to combination of factors related to sharply rising international energy & commodity prices and unfavorable exchange rate adjustments. The average inflation was recorded at 11.3pc during July-May fiscal year as compared to 8.8pc in the comparable period of last year.

However, the inflation is now mainly contributed by food as was the case in last year as well. Average food inflation remained relatively lower at 12.1pc compared to 12.9pc during the same period of last year whereas, non-food inflation rose up to 10.7pc during 11MFY22 compared to 6.1pc during the same period of last year. The global spike in the commodity markets is feeding into domestic inflationary pressures through imported intermediate and consumer goods.

The previous inflationary pressures were primarily driven by non-core components like food and energy, however, recently core components also started to reflect the impact of rising effective import prices. The major contributors of inflation include higher global commodity price spike in electricity charges, POL prices and transportation cost.

Recent tapering off of the pandemic was more than offset because of sanctions on Russia and oil disruptions, and Indonesian decision to impose ban on palm oil exports. IMF has raised the inflation forecast for developed, developing and emerging economies as “with elevated price pressures expected to persist for longer. Supply-demand imbalances are assumed to decline over 2022 based on industry expectations of improved supply, as demand gradually rebalances from goods to services, and extraordinary policy support is withdrawn”.

Crude oil prices which witnessed slight downward trend during November and first fortnight of December, bounced back and started escalating since January2022, and touched a 7-year high level. Palm oil prices continued their upward swing to touch new height.

The current account posted a deficit of $13.8 billion (3.5 pc of GDP) during July-April 2021-22 as against $543 million (0.2pc of GDP) last year. Current account deficit widened due to constantly growing import volume of energy and non-energy commodities, along with a rising trend in the global prices of oil, food and metals besides import of COVID-19 vaccines.

Trade deficit deteriorated by $10.9 billion due to import growth outpacing export growth by a fair margin. Higher inflows of remittances and export receipts were able to offset just over half of this increase. As a result of number of supportive measures delivered by the government, the economy posted a robust growth in exports to the extent of 28pc; however, imports growth of 39pc outpaced the export growth.

Services account deterioration is primarily caused by higher shipment cost. Imports related to transport services increased by 91.9pc and its major contribution came from 88.9pc increase in sea transport. Export of services registered 18pc growth with significant increase of 29pc in ICT related exports. Import of services registered much faster growth of 34pc that led to widening of services trade balance.

Exports (fob) grew by 27.8pc during July-April 2021-22 and reached $26.8 billion ($21 billion last year). Increase in exports was across the board with textile leading with a growth of 61pc followed by food group (18pc), petroleum (0.7pc) and other manufacturing exports (14pc). Textile exports increased by $2.9 billion responding well to government’s provision of regionally competitive electricity tariffs, higher export financing and other incentives. It was predominantly price effect (65pc) in textile sector whereas quantum effect (35pc) also played a role to enhance the export volumes.

The surge in merchandized imports is phenomenal – which grew by 46.4pc during the period July-April 2021-22. The chart below shows that price effect is more pronounced in imports than the quantum in most of the items, specifically POL, edible oils and medicines.

Around 87pc of increase in imports is explained through higher global prices. Total increase in imports during the period (on shipment basis) is $21 billion and it is explained by petroleum group ($8.3 billion), vaccine& medicine ($2.9 billion), raw materials ($5.5 billion), iron and steel ($2.1 billion), road motor vehicles ($1.2 billion) and textiles ($781 million). Import of textile machinery surged by 56pcand textile group imports surged by 25pc and understandably as import of raw material for domestic industry was inevitable as the domestic cotton production has been declining for three consecutive years.

Petroleum group contributed almost two-fifth of the increase in imports while the rest of sectors shared increment evenly. Petroleum products contributed the single largest share (40pc increase) while the second largest increase was accounted by vaccine imports ($2.9 billion increase). Raw materials accounted for 26pc share in increase in imports just above the share of machinery group at 6.7pc.

Remittances reached $26.1 billion showing a growth of 7.6pc during July-April 2021-22 over the same period of last year. Government’s digitalization initiatives helped in boosting remittances in the recent past; however, the quantum of monthly inflows is marginally declining. Remittances are consistently in $2.5 billion plus zone for the last 24 months barring January and February 2022, and remittances in April 2022 touched highest ever level in a single month.

Gross Foreign Exchange Reserves reached $16.2 billion by week ending May 13, 2022 with commercial banks holding of $6 billion and the SBP reserves of $10.2 billion. Forex reserves are still providing import cover of less than 3 months. Gross forex reserves fell by over $5 billion only in March 2022.

Copyright Business Recorder, 2022

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