The growth rate of Pakistan has been significantly overstated in several sectors including crops, livestock, forestry, fishing, construction and general government services. This brings down the gross domestic product growth rate from 4.2 percent to 3.6 percent. Over the past five decades, the economy has grown by less than four percent in a year when the industrial sector achieves a growth rate of less than four percent between 2014 and 2015, reveals a fact sheet released by the Institute of Policy Reforms (IPR) commenting on the economic survey 2014-15 released on June 04.
Out of the 15 targets in the Annual Plan for 2014-15, four are likely to be achieved. These include the rate of inflation, current account in the balance of payments, growth of imports and net foreign assistance. The precipitous fall in global oil and other commodity prices is the primary explanation for achievement of these targets.
The eleven targets which will be missed include the GDP and sectoral growth rates, private and public investment, export growth and the level of foreign direct investment. "The important crops and large scale manufacturing sectors have shown low growth and have contributed to keeping Pakistan in the low growth trap. Labour market conditions have deteriorated and tax revenues have shown only moderate growth, despite a heavy dose of taxation proposals. The PSDP has been cut. The power sector continues to underperform and perhaps for the first time, social development indicators have started falling. We hope that these soft spots will be largely removed in 2015-16," the fact sheet added.
The low growth rate of the important crops sector is attributable to a 1.1 percent drop in wheat, fall of five percent in maize and 7.1 percent decline in sugarcane output. Due to adverse weather conditions, the reduction in wheat output may be even larger. Fortunately, the big jump in cotton output of 9.5 percent has compensated for the fall in other crops. Despite the floods in Punjab, it is reassuring to note that the output of rice has still shown a growth rate of three percent. However, the exports of basmati rice, in particular, have fallen by as much 22.5 percent.
The large-scale manufacturing sector remains sluggish. It has grown on average in the last six years by less than one percent annually. This year the growth rate is estimated at 2.5 percent, compared to 4 percent last year. The textile sector has shown little growth in the first nine months of 2014-15. Food, beverages and tobacco industries are showing a decline. The growth rate of the cement and fertiliser industry is below three percent. The only industries which have shown high rates of growth are automobiles and iron and steel products. Overall, out of the 98 items covered by the Quantum Index of Manufacturing of PBS, 41 items show a negative growth rate, while 11 items have a growth of less than two percent.
The services sector has performed well in 2014-15, with a growth rate approaching five percent, as compared to 4.4 percent last year. The dynamic sectors have been finance and insurance (6.2 percent), general government services (9.4 percent) and private services (5.9 percent). However, as highlighted above, we believe that the growth rate in some services is overstated.
According to the IPR fact sheet the focus of fiscal policy is on stabilisation, not on growth. FBR tax revenues have increased by 12.7 percent only in the first ten months as compared to the budgeted growth rate of 24 percent in 2014-15. Even the lowered target of Rs 2691 billion is unlikely to be met. The initially negative impact of the fall in oil prices has been countered by increases in the GST (for example, from 17 to 32 percent in the case of HSD oil) and by imposition of regulatory duties on POL products (like 7 percent on furnace oil).
Current expenditure has shown moderate growth at the federal level of 10 percent in the first nine months. Costs of debt servicing have risen by seven percent, less than anticipated due to the fall in interest rates. Despite the costs of Zarb-e-Azb, the defence expenditure has gone up by 7.5 percent, again below the projected growth rate.
The shortfall in revenues has already led to a cut back in PSDP releases. As of May 22, an amount of Rs 385 billion has been allocated, equivalent to 73 percent of the annual targeted PSDP. The federal fiscal deficit is estimated in the first nine months at Rs 1227 billion, equivalent to 4.5 percent as compared to 4.2 percent of the GDP last year. The annual target is 5.9 percent of the GDP. Therefore, there is the likelihood that the deficit will exceed the target.
Provincial own tax revenues have grown by only 6.6 percent, while expenditures have risen at a much faster rate, current expenditure at 14.6 percent and development spending by 45.5 percent. The provinces appear to be establishing higher expenditure benchmarks for the 9th NFC Award. It is unlikely that the combined provincial cash surplus will reach the targeted level of Rs 289 billion.
'The federal fiscal deficit is being financed disproportionately by the scheduled banks in 2014-15. Borrowings from these banks are financing almost 75 percent of the deficit. This has enabled the government to bring down its borrowings from SBP by over Rs 360 billion as of May 22," the fact sheet said.
Private investment has continued to fall to one of its lowest levels ever of 9.7 percent of the GDP. Factors contributing to the fall are acts of terror, law and order situation in Karachi, high levels of power load shedding, shortage of gas and crowding out of the private sector from bank credit.
One of the major positive developments in 2014-15 is the unprecedented fall in the rate of inflation from 7.7 percent in July 2014 to 2.1 percent only in April 2015. It has risen somewhat last month to 3.2 percent. The fall in the rate of inflation is due primarily to the fall in international commodity prices, especially of oil, by over 40 percent. Consequently, domestic food and fuel prices have registered significant declines, although the government has limited the transmission effect by imposition of large regulatory duties on basic food items like wheat and sugar.
The core rate of inflation stands currently at 4.9 percent. Therefore, some demand pressures continue to persist in the economy. The international price of oil has started to rise once again. Also, prices of food items like livestock products, pulses, onion and tomato have experienced big increases in 2014-15.
According to the fact sheet the balance of payment position has improved. The main factor contributing to the improvement is the virtual halving of the current account deficit. In fact, it has turned positive in recent months as imports have fallen due to the containment of the oil import bill, and continued buoyancy in home remittances.
Net credit inflow from IMF is larger at almost US two billion dollars. Foreign exchange reserves have risen by US 2.8 billion dollars as of May 29, in 2014-15. However, this increase is due entirely to external borrowings and privatisation receipts.
The power sector continues to underperform. According to the economic survey there is an increase of only 792 megawatts in electricity generation capacity in the first nine months of 2014-15. The actual generation has fallen by 2.3 percent. Further, the fall in generation raises serious questions about how the economy can grow at over four percent with less power.
The use of thermal power in electricity generation has also fallen by 2.8 percent, despite the over 17 percent increase in the consumption of furnace oil. Fortunately, there has been a modest increase of 1.3 percent in the consumption of electricity, despite the fall in generation. This implies some reduction in transmission and distribution losses.
Comments
Comments are closed.