The Annual Plan for 2022-23 has been presented by the Planning Commission. This plan comes at a critical time when there is considerable uncertainty about the short-run prospects for the economy of Pakistan.
This uncertainty has been aptly recognized by the Plan. It has the subtitle of: ‘From Stabilization to Sustainable Growth’
This indicates that the expectation is that the next year will witness an end to the prevailing risks and uncertainty. The economy will be stabilized with a big reduction in the current account deficit in the external balance of payments which will lead to the accumulation of foreign exchange reserves to a safe level. Thereafter, the economy can proceed on the path of relatively high and sustainable growth.
The first part of the Plan contains a review of the likely economic outturn in 2021-22. As estimated by the Pakistan Bureau of Statistics (PBS), the GDP growth rate is expected to be close to 6 percent. The inflation rate will be close to average monthly rate of 11.5 percent. The current account deficit for the year is estimated at $15.6 billion and the outlay on the PSDP for 2021-22 at Rs 550 billion.
The likelihood of a GDP growth rate of over 6 percent in 2021-22 is not high. The fourth quarter has witnessed substantial power load-shedding. There has been a big shortfall in wheat output. Interest rates have risen sharply. The 6 percent growth rate hinges on household consumption expenditure growth rate in real terms of as high as 10 percent. This is totally contrary to the ground reality whereby consumption levels have fallen sharply due to the high rate of inflation.
The Plan should have highlighted the continuing upsurge in the rate of inflation in 2021-22, which has risen to 13.8 percent by May 2022. This represents the starting point to the inflationary process in 2022-23.
The estimated current account deficit in 2021-22 is $15.6 billion. However, it has already reached $15 billion by May 2022. Therefore, it is likely to be closer to $16.5 billion.
The targets in the Plan for 2022-23 are as follows:
=================================== Growth Rates (%) =================================== GDP 5.0 Agriculture 3.9 Industry 5.9 Services 5.1 Private Investment 1.7 Trade Deficit -16.3 Exports 3.8 Imports -7.4 Current Account Deficit -42.1 =================================== Rate of Inflation 11.5 ===================================
The above targets border on excessive optimism. A GDP growth rate of 5 percent will be difficult to achieve in the presence of very contractionary monetary and fiscal policies. The policy rate of the State Bank of Pakistan (SBP) is already relatively high at 13.75 percent and there is pressure for it to be raised even further. This will greatly restrict private investment.
The 2022-23 federal budget includes a large dose of additional taxation. The big jump in administered prices of electricity, gas and petroleum products will lead to an escalation in costs and restrict output in different sectors. Power load-shedding is likely to persist because of shortage of imported fuel.
On top of all this, there is need for restricting the level of aggregate demand in the economy if imports are to be reduced in dollar terms by over 7 percent. The Plan expects global commodity prices to slide in the face of recessionary tendencies in the world economy. But prices started rising rapidly only after March 2022, with the advent of the Russia-Ukraine war. Even if they come down from present levels, they are still likely to be higher in 2022-23 in relation to the average price level in 2021-22. If the current account deficit is to be reduced by almost $7.5 billion in 2022-23 various measures for import containment will be required including a big depreciation in the value of the rupee.
Consequently, the inflation target of 11.5 percent in 2022-23 is likely to be significantly on the low side. The combined impact of much higher administered prices, big depreciation in the value of the rupee and continued relatively high commodity prices are likely to lead to high double-digit inflation.
Therefore, in contrast to the ambitious targets in the Annual Plan for 2022-23 the projected range of magnitudes of key macroeconomic variables for the year are as follows:
======================================= Growth Rates (%) ======================================= GDP 3.5 to 4.0 Agriculture 2.5 to 3.0 Industry 4.0 to 5.0 Services 3.7 to 4.0 Private Investment -5.0 to-10.0 Trade Deficit -15.0 to-20.0 Exports 3.0 to 5.0 Imports -6.0 to-8.0 Current Account Deficit -40.0 to-45.0 ======================================= Rate of Inflation 15.0 to 17.0 =======================================
Therefore, the bulk of the effort of policies in 2022-23 will have to be on stabilizing the economy by achieving a near halving of the current account deficit to limit the external financing requirements. Otherwise, with foreign exchange reserves at the end of 2021-22 only enough to provide import cover for two months, the economy will remain vulnerable to a financial crisis. Achieving sustainable growth will hopefully come in subsequent years.
Copyright Business Recorder, 2022