Information on many of the key macroeconomic variables has become available up to March 2019 and in some cases up to February 2019. Therefore, the trends in the national economy during the first three quarters of 2018-19 can now be analyzed.
Growth The sharp slowdown in the economy since June 2018 had become visible earlier. Now there is some additional information to confirm this trend. First, the decline in production of Kharif crops, especially cotton and sugarcane, has begun to affect production of yarn and sugar. The wheat crop in the on-going Rabi season may also be adversely impacted by the untimely rainfall.
Second, the Quantum Index of Manufacturing (QIM) continues to show negative growth, with a fall of 1.7 percent up to February 2019. Nine out of the fifteen industrial groups exhibit a negative trend. Perhaps for the first time, both agriculture and large-scale manufacturing, will experience negative growth in 2018-19. Consequently, GDP growth is unlikely to significantly exceed 3 percent this year.
Investment The rise in interest rates, higher costs of imported machinery due to the large devaluation of the rupee and a prevailing uncertain economic situation have negatively impacted on private investment. A key indicator of this decline is the big fall in import of machinery of 21 percent in the first nine months of the current financial year. The fall is in most types of machinery, including power generation and electricity, textiles and construction machinery.
Public investment has also plummeted. Releases to projects in the Federal PSDP have fallen cumulatively by 23 percent up to April in relation to the level last year. Provincial Governments, especially Punjab, have also cut back sharply their development spending. Overall, the level of fixed capital formation may fall to 13.5 percent of the GDP in 2018-19 as compared to 14.8 percent of the GDP in 2017-18.
Inflation There has already been some public hue and cry on the precipitate jump in the rate of inflation as measured by the Consumer Price Index (CPI). This jump from 3.9 percent in 2017-18 to 9.4 percent in March 2019 is largely the result of the rise in landed prices of imported goods due to the devaluation and to the escalation in gas and electricity prices. The rate of inflation may rise to 12 percent by June 2019.
Employment There is the likelihood that with GDP growth rate of close to 3 percent, the rise in employment will not exceed 800,000. However, the labour force expands annually by almost 2.8 percent. Consequently, the number of unemployed workers is likely to rise by almost one million by the end of 2018-19. This implies that the unemployment rate could rise from under 6 percent to almost 7 percent. Educated, young and female workers will, in particular, have difficulty in findings jobs this year.
We turn now to the two deficits, namely, the budget deficit and the current account deficit respectively.
Public finances The trends in public finances are especially worrying. There has simultaneously been a loss of momentum generally in revenues, both tax and non-tax, and a big jump in current expenditure, especially on debt servicing and defense. The cutback in development spending has not been adequate to restrict the overall growth in expenditure.
According to the data provided by the SBP, the consolidated fiscal deficit has reached Rs 1811 billion by the end of the February 2019. This has been financed to the extent of Rs 1538 billion by domestic borrowing and by external borrowing of Rs 273 billion. The fiscal deficit has already reached 4.7 percent of the GDP in the first eight months. At this rate, it is likely to exceed 7 percent of the GDP by the end of 2018-19. The target for the year was a deficit of 5.1 percent of the GDP. The big spillover by almost 2 percent of the GDP reflects on the quality of fiscal management by the new Government.
Balance of payments The solitary positive development has been the big containment in the size of the current account deficit. During the first nine months there has been a decline of $4 billion in the deficit, equivalent to a reduction of almost 30 percent. This is attributable, first, to a fall in the trade deficit in goods and services of 13 percent and, second, to a rise in home remittances of almost 9 percent.
The fall in the trade deficit is due entirely to the decline in the level of import of goods and services by almost 8 percent. The imports of machinery and transport equipment, in particular, have fallen sharply. Unfortunately, despite the large devaluation and various incentives, exports have shown no growth. The restoration of growth in exports is essential for a sustained reduction in the size of the current account deficit.
The financial account of the balance of payments shows a net inflow of almost $11 billion, as compared to $9.4 billion in the corresponding period of 2017-18. However, the improvement is due to the deposit of $5 billion by Saudi Arabia and the UAE with the SBP. Traditional donors, like the multilateral agencies have reduced sharply their financing and the net inflow from this source has become negative. Reserves at the end of March 2019 stood at $10.5 billion, equivalent to a reserve cover of over two months.
Overall, the year 2018-19 is likely to be a year of stagflation, with rising inflation and a big fall in the growth rate of the economy. The projections for the key macroeconomic variables are as follows:
-- GDP Growth Rate: 3% - 3.5%
-- Rate of Inflation (average): 8.25% - 8.50%
-- Rate of Inflation (end period): 11% - 12%
-- Rate of Investment: 15% - 15.5% of GDP
-- Unemployment Rate: 7%
-- Budget Deficit: 7% -7.25% of GDP
-- Current Account Deficit: 12 - 12.5 Billion $
-- Foreign Exchange Reserves (30th June 2019): $8.5 - 9.0 billion.
(The writer is Professor Emeritus at BNU and former Federal Minister)
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