0
ISLAMABAD, Aug 30: The sound macroeconomic fundamentals, accomplished over the last 2-3 years, will help achieve the GDP growth target of 4.5 per cent in 2002-03, says an Asian Development Bank report released here on Friday.
However, the report “Pakistan Economic Update (July 2001 to June 2002),” released along with economic outlook for 2002-2003, said inflation, which picked up towards the end of 2001-02, is expected to rise during the current financial year.
It said the growth performance of the economy is expected to improve further in 2002-03 due to the greater availability of water after the recent rains have improved prospects of the agriculture sector, as well as for electricity generation.
The upturn in the large-scale manufacturing sector, observed in the March-May 2002 period, was likely to continue during the current year and that the sharp increase in remittances was expected to boost construction activity.
The report said the upturn in exports and imports in the fourth quarter of 2001-02 was likely to be sustained in 2002-03. Exports should benefit from the revival of the global economy and greater access to the European Union markets, and with the anticipated revival of the domestic economy and higher oil prices, imports would also increase.
Remittances will be sustained at the high level attained in 2001-02, as these have mostly resulted from a shift from the hundi system to banking channels. Overall, the surplus in the current account of the balance of payments, however, is expected to be smaller than last year.
The medium-term prospects for the Pakistan economy have improved due to reprofiling of foreign bilateral debt, improvement of relations with the G-7 countries, greater access to the European Union markets, and modernization of textile industry underway for the last couple of years.
If the government continues to pursue sound macroeconomic policies and implement the planned governance reforms, it should be possible to achieve the growth target of 5 per cent, set for 2003-04 in the medium-term macroeconomic framework under the Poverty Reduction and Growth Facility.
The Pakistan economy demonstrated great resilience during 2001-02 in the face of external shocks generated by the post-September 11, 2001, developments, tensions with India, global recession, and continuing drought.
Macroeconomic fundamentals improved further, and the real GDP growth rate increased to 3.6 per cent from 2.5 per cent in 2001-02, the annual inflation rate declined to 2.8 per cent from 4.4 per cent, and the current account of the balance of payments posted an unprecedented large surplus.
DOMESTIC SECTOR: The increase in GDP growth in 2001-02 was mainly due to the agriculture sector, which, despite continued drought, performed better than the previous year.
Growth of value-added in the sector is estimated at 1.4 per cent in contrast with a contraction of 2.6 per cent in the previous year. Growth of the industry sector was slightly lower (2.8 per cent) than in the previous year (3.1 per cent), mainly because of a sharp deceleration in the large-scale manufacturing sector.
The large-scale manufacturing sector suffered the most by the post-September 2001 developments and the global recession. Its growth declined to 4 per cent from 8.6 per cent in 2001-02. However, production in the latest three-month period (March-May 2002), for which the data is available, shows a significant turnaround in the large-scale manufacturing sector, which is likely to continue in 2002-03.
The growth of the services sector, which contributes 50 per cent to GDP, also improved somewhat during 2001-02.
The post-September 2001 events, tension on border with India throughout the second half of 2001-02, terrorist attacks in Karachi and other cities, and general uncertainty undermined investor confidence. As a result, lower interest rates failed to stimulate domestic private investment. Total private investment, in real terms, in 2001-02 was only marginally higher than the previous year.
The fiscal balance worsened in 2001-02, with the consolidated budgetary deficit increasing to 7.1 per cent of GDP from 5.2 per cent in 2000-01. However, after adjusting for one-time expenditures, the budget deficit in the last financial year was 5.7 per cent of GDP.
Consolidated expenditure of federal and provincial governments increased by 20 per cent, mainly due to some one-time expenditures, mobilization of troops on border with India, and higher development expenditure. Revenues, on the other hand, increased by only 12 per cent, mainly on account of large increases in non-tax revenues and surcharges on petroleum. Tax receipts increased by only 2 per cent.
The Budget 2002-03 aims at further consolidation of fiscal stabilization, while protecting social and development expenditures. The target for overall budgetary deficit has been set at 4.4 per cent of GDP, 2.7 percentage points lower than in 2001-02. The efforts to reduce the fiscal deficit rely mostly on reduction in expenditure, which will contribute 2.1 percentage points to reduction in the deficit. Despite reduction in overall expenditure, expenditure on reducing poverty and development expenditure are to increase by 18 per cent and 15 per cent, respectively.
EXTERNAL SECTOR: Despite the adverse impact of the global economic recession and post-September 11, 2001, developments on Pakistan’s exports, the country’s balance of payments improved significantly during 2001-02 due to a sharp increase in workers’ remittances and larger inflow of foreign grants. The deficit in the current account, which had persisted throughout the last two decades, turned into a surplus of $2.7 billion in the first 11 months of the last financial year. As a result, the country’s foreign exchange reserves almost doubled during the year.
While the global recession depressed the demand for Pakistan’s exports, continued slowdown in the domestic economy resulted in decline in imports. Exports declined by 0.8 per cent and imports by 3.7 per cent in 2001-02. Both exports and imports experienced a turnaround in the fourth quarter of the year, recording increases of 4 per cent and 11 per cent, respectively. The upturn in imports, particularly those of raw materials, intermediate goods, and machinery, provides signs of a turnaround in the economy.
The improvement in the current account of the balance of payments was broad-based, as all the three components of the current account showed significant improvements. The trade balance, though still negative, improved sharply in 2001-02 due to a larger decline in imports than in exports and faster realization of export bills prompted by the sustained appreciation of the rupee. There was a substantial reduction of $515 million (or 18 per cent) in the services account largely due to receipts from the USA against logistic support provided for war in Afghanistan and smaller interest payments resulting from falling stock of foreign private loans and FE45 deposits.
The largest improvement was seen in current transfers, the third component of the current account, as net transfers increased to $5.3 billion in the first 11 months of the year compared with $4.2 billion in the corresponding period of 2000-01. Sharp increases of 112 per cent and 76 per cent in remittances and official grants, respectively, contributed to improvement in current transfers.
