An internal reality check

June 10, 2019


UNLIKE its public discourse, the PTI government candidly concedes in its official deliberations that the shrinking size of the Public Sector Development Programme (PSDP), monetary tightening and the higher debt servicing cost owing to substantial currency depreciation are some of the key factors behind the sluggish economic performance in the outgoing fiscal year.

On top of that, it also attributes the dismal performance of the real sectors as major contributors to the low 3.3 per cent GDP growth rate in 2018-19 against a target of 6.2pc that the PTI thinks was ‘ambitious’ to begin with.

At the same time it blames the legacy impact of macroeconomic imbalances, overvalued rupee and adjustment process beginning December 2017 to have already started taking toll on growth momentum.

In a position paper on economic performance to the National Economic Council (NEC), the Planning Commission explained why economic growth decelerated from 5.5pc in 2017-18 to 3.3pc in 2018-19.

It said two important commodity producing sectors, agriculture and manufacturing, witnessed negative growth. Agriculture faced a long dry spell during the last almost two years which had serious repercussions for output.

The growth target was ambitious at the time of its presentation and it became big ask when agriculture sector faced unprecedented water scarcity as supply was inadequate for kharif and rabi crops

“The construction sector was a victim of the shrinking size of the PSDP and the non-filer ban. Services sector performance also came under stress owing to a spillover of the commodity sector and lower imports”, the paper noted.

“Debt servicing cost increased with rupee depreciation, further widening the fiscal deficit amid limited sources of revenue generation. These factors acted as a drag on overall growth”.

With a high policy rate now in place, money supply (M-2) grew by 3.9pc (Rs652 billion) during July-April 2018-19 as compared to 4.1pc (Rs602bn) during the corresponding period last year. “Scheduled banks witnessed net contraction of Rs2.131 trillion during the July-April period compared to retirement of Rs466bn in the comparable period last year”.

The government borrowings from the State Bank of Pakistan (SBP) increased substantially to Rs3.205tr from Rs1.316tr last year.

“Notwithstanding fuelling inflationary expectation, this shift in borrowings from the scheduled banks to the SBP may create space for credit to private sector, which expanded by Rs580bn during the first 10 months of 2018-19 as compared to the expansion of Rs498.4bn last year.”

The external account adjustment was successful, according to the planning commission, as the current account deficit during the third quarter of 2018-19 almost halved as compared to the second quarter.

“However, fiscal deficit adjustment could not achieve desired results owing to massive tax shortfall and surging debt servicing liabilities because of rising interest rate in internal and external markets as well as 34pc rupee depreciation during the last 12 months”.

The fiscal deficit is set to widen further during the current fiscal year primarily because of revenue shortfall and rising expenditure demand.

The paper reported that the Annual Plan 2018-19 envisaged real GDP growth of 6.2pc based upon sectoral growth projections for agriculture, industry and services at 3.8pc, 7.6pc and 6.5pc, respectively.

Services sector was affected by the decline in commodity producing sectors and registered growth of 4.7pc

The actual growth turned out to be at 3.3pc, supported by agriculture (0.85pc), industry (1.4pc) and services (4.7pc). “The growth target was ambitious at the time of its presentation and it became big ask when agriculture sector faced unprecedented water scarcity as supply was inadequate for kharif and rabi crops”.

Agriculture was targeted to grow by 3.8pc with expected contributions of important crops (3pc), other crops (3.5pc), cotton ginned (8.9pc), livestock (3.8pc), fishery (1.8pc) and forestry (8.5pc). However, agriculture registered a growth of 0.85pc, considerably below its target. Major kharif crops of cotton, rice and sugarcane registered a decline in production whereas wheat crop also barely met its target.

Important crops declined by 6.5pc while other crops registered growth of 1.9pc. Livestock, forestry and fishery achieved growth of 4pc, 6.5pc and 0.8pc, respectively.

Cotton crop registered a decline of 17.4pc in its production with 9.86 million bales in 2018-19. This decline came from a shortage of irrigation water, use of low quality inputs such as inferior seed and fertilisers at the early stage of the crop, and reduction of 12pc in sown area.

Production of wheat increased minimally by 0.5pc. Diseases such as rust and smut affected the overall yield per acre of the crop. Production of rice registered a decline of 3.3pc, whereas production of sugarcane also declined by 19.4pc over last year’s. The area sown for rice and sugarcane decreased by 3.1pc and 17.9pc respectively.

The industrial sector posted a low growth rate of 1.4pc against the target of 7.6pc. Manufacturing, construction, mining and quarrying showed a decline in growth and only electricity generation and distribution posted growth rate of 40.5pc. Large scale manufacturing registered a decline of 2.06pc.

Services sector was affected by the decline in commodity producing sectors and registered growth of 4.7pc against a 6.5pc target. However, general government services and other private sector services contributed by surpassing their targets and registering growth rates of 8pc and 7pc, respectively.

General government services grew by 7.9pc compared to its target of 7.2pc. Other private services, which include renting of machinery and equipment, education, recreational, cultural and sports activities grew positively at 7pc against the target of 6.8pc.

Wholesale and retail trade grew by 3.1pc, below its target of 6.5pc. Transport, storage and communications managed to grow by 3.3pc against its target of 4.9pc. Finance and insurance also missed its growth target of 7.5pc as it attained a growth of 5.1pc.

Published in Dawn, The Business and Finance Weekly, June 10th, 2019