June 10, 2019 (MLN): The incumbent government’s economic team has failed to achieve the GDP growth target, as overall key target set for FY19 was missed by 300 basis points due to poor performance of most of the major economic indicators.

The government of Pakistan has released the Economic Survey for Fiscal Year 2018-19 earlier today which revises the country’s economic journey during the said period.

As per the relevant document, the present government that took control two months after the start of fiscal year in August 2018, took difficult decisions in reducing the overvaluation of exchange rate and aligned it to the market value-based exchange rate adjustments, increasing policy interest rate and energy prices which were kept subdued since last year.

The government’s success in mobilizing additional financing from friendly countries in the form of short- to medium-term loans, deferred payment on imported oil and temporary deposits in the central banks, was also emphasized upon.

It was recalled that Saudi Arabia, United Arab Emirates (UAE) and China agreed to provide financial assistance worth $6 billion ($3 billion in short loan and $3 billion in the shape of deferred payment on oil imports), $1 billion and $2.2 billion respectively.

However, despite some of these positive measures, growing tensions between India and Pakistan in February 2019 adversely impacted international business in the country.

Furthermore, the global growth forecast for 2019 and 2020 was revised downward in the latest World Economic Outlook (WEO) by IMF, partly because of the negative effects of tariff increases enacted in the United States and China earlier in the year.

The areas that were statistically covered by the Advisor to Prime Minister on Finance Mr. Abdul Hafeez Shaikh are as follows:

• The provisional GDP growth rate for FY2019 is estimated at 3.3 percent on the basis of 0.9, 1.4 and 4.7 percent growth in agricultural, industrial and services sectors respectively.
• For FY2019, Commodity Producing Sectors has been again overshadowed by growth in the Services sector which contributed 2.9 percentage points or 86.4 percent while Commodity Producing Sectors contributed to only 0.4 percentage points to overall growth.
• The agriculture sector grew by 0.85 percent. The crops sector has witnessed negative growth of 4.4 percent during FY2019 mainly due to negative growth (-6.6 percent) in important crops due to decline in production of cotton, rice and sugarcane.
• During FY2019, the provisional growth in industrial sector has been estimated at 1.40 percent mainly because of decline in growth to 2.06 in large scale manufacturing sector percent while mining and quarrying sector has witnessed a negative growth of 1.96 percent.
• Electricity and gas sub sector grew by 40.54 percent. The main reason of this abrupt growth is due to 48.4 percent growth in expenditures at current prices on Gross Fixed Capital Formation in Electricity Generation & Distribution and Gas Distribution sector last year.
• The construction activity has decreased by 7.57 percent due to conservative construction-related expenditure reported in rest of the economic activities.
• Provisional estimates has shown that the services sector posted a growth 4.71 percent during FY2019. Wholesale and Retail Trade sector grew at a rate of 3.11 percent.
• Finance and insurance sector showed an overall increase of 5.14 percent, despite a decline (of 12.5 percent) in value add of the central bank, as scheduled banks, non-scheduled banks and insurance sub-sector posted positive growth (5.3 percent, 24.6 percent and 12.8 percent, respectively).
• The Housing Services grew by 4.0 percent and the General Government Services by 7.99 percent. It is mainly driven by the increase in salaries of federal, provincial and district governments.
• Other private services, which is composed of various distinct activities such as computer related activities, event management, education, health & social work, NGOs etc. has contributed positively 7.05 percent.
• The provisional estimates of Gross Fixed Capital Formation (GFCF) for the year FY2019 stands at Rs.5340.0 billion and posted a growth of 1.9 percent when compared to FY2019.
• Consumption patterns in the country and its share in GDP had risen to 94.8 percent almost the same level as similar to last year (94.2 percent). 
• The share of Public Consumption in the GDP increased to 12.6 percent during FY2019 from 11.7 percent in FY2018 while the share of Private Consumption in the GDP remained almost stagnant at 82 percent.
• During July-April FY 2019, foreign direct investment (FDI) dropped by 51.7 percent and foreign private investment also declined by 64.3 percent. 
• Exports growth picked up in preceding year, while, exports during this year have not picked up as expected.
• During July-April, FY2019, the exports decreased by 1.9 percent.
• During the said period, imports growth reduced by 4.9 percent, while last year during period under discussion, imports were higher by 19.9 percent.
• During FY2019, Net Exports of goods and services posted a growth of 3.9 percent compared to FY 2018.
• With sizeable adjustment in the interest and exchange rates to ease the pressure on the BOP, Saving-Investment gap contained by 27 percent during July-April FY 2019 compared to 70 percent expansion during same period last year.
• During July-April FY 2019, workers’ remittances posted a significant growth of 9 percent.
• Domestic saving in FY2019 remained at 4.2 percent of GDP much lower than the level achieved in FY2004 where it was 15.6 percent of GDP.
• Private sector borrowing in first 10MFY19 was up to Rs.587.6 billion, against the borrowing of Rs.532.6 billion in the comparable period last year. On average, it has posted growth of 9.8 percent during the period under discussion in FY2019 against the growth of 10.2 percent in the comparable period of FY2018.

On the other hand, following development took place within the Special Economic Zones:

• Under CPEC, 9 sites have been identified for developing special economic zones. Pakistan’s side has prepared feasibilities and bankable documents to develop these SEZs in line with the modern trends, taking input from the Chinese development model.
• After implementation of the early harvest projects, the ground is set to generate positive socio-economic impacts of CPEC by enhancing Industrial Collaboration. This will help create efficient and competitive industrial clusters to attract investment and to diversify exports.
• Chinese SMEs and Start-ups are quite capable and very keen to come and invest in Pakistan.

Measures aligned for future:

• Government of Pakistan has already announced a comprehensive and a business-friendly incentive package aimed at up-scaling investors’ relations with China and other nations, to promote the industry and employment; strengthen and form new industry clusters as well as promote exports of goods and services.
• Target is to create 10 million jobs in five years. Private sector will play a key role in creation of jobs supported by the government.
• To maintain a balance between pro-consumer and pro-business regulations, both provision of quality services as well as promotion of investment will be ensured.
• For the youth, the government has launched a new program – the Kamyab Jawan Program. Under this program, the National Bank of Pakistan, Bank of Punjab and Bank of Khyber will provide low cost loans to the youth (agreed between 21 – 45 years) for establishing of small businesses enterprises.
• The renewable energy policy is being updated to clearly quantify and qualify the renewable energy share and addition to the national grid.

The survey document states the present government’s significant measures to curb aggregate demand that has compounded the size of external current account deficit to an unprecedented level.

During FY2019, the economy felt partial adjustments due to inertia as evident from still high consumption to GDP ratio and fiscal deficit. Irrespective of direction of cause, historically, there is significant relationship between trade deficit and budget deficit.

Policy makers thus take the stand that by limiting fiscal deficit, trade deficit can be controlled. Thus optimum fiscal strategy will make tariff adjustments accordingly to stop the growth of quasi-fiscal deficits along with generating the revenue resources.

The economy, therefore, still needs strict stabilization policies along with extensive structural reforms even without IMF program.

However, after entering IMF’s Extended Fund Facility (EFF) (US$6 billion), not only an ease in requisite external financing will be provided, but also market confidence will be strengthened and additional financial support from other development and bilateral partners which will further support the stability and moving toward high and inclusive growth.

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