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ISLAMABAD: Finance Minister Ishaq Dar on Thursday evening unveiled the Pakistan Economic Survey 2014-15, with a focus on success stories over missed targets.

The minister had set an economic growth target of 5.1 per cent in the current year’s budget. At a provisional growth rate of 4.2pc, the target has been missed by a wide margin, but is still better than previous year’s 4.03pc.

Fiscal year 2014-15 (FY14-15) was a mixed bag for Pakistan’s economy, with several positives to take hope from, but not without a fair share of alarm bells — as always.

To get an economic snapshot of Pakistan right before the start of a new fiscal year, we look at some indicators over the past six years, including the latest numbers from the FY14-15 Pakistan Economic Survey (PES) and where convenient, compare performance with regional peers and historical numbers for evaluation.

Real GDP growth: Pakistan still lagging behind in S Asia

For FY14-15 ending in June, Pakistan’s GDP grew 4.2pc which confirms two consecutive years of increased growth after a couple of years of stagnancy.

The difference between budgeted and achieved real GDP growth was much greater than it has been in previous years, displaying a need for the government to set realistic and achievable targets for economic performance.

While the GDP growth rate is commendable given Pakistan's past performance, growth is still far below the 5-7pc required to absorb new entrants into the labour force to check rising unemployment.

If we compare these numbers with GDP growth for the entire South Asian region — of which Pakistan is the second largest economy — we find that Pakistan’s growth of almost 4pc in the past five years lags its regional peers in South Asia which averaged almost 7pc (as shown below).

Source: World Bank
Source: World Bank

Bangladesh has been growing at over 6pc for the past few years while India, despite two years of modest growth in 2012 and 2013, has been able to maintain average growth of well over 5pc in the past five years.

Growth this year was driven by gains in the agriculture, manufacturing and services sectors.

Over the 2011-2015 period, average growth was 2.9pc, 3.17pc, 4.95pc for each sector respectively.

Inflation: Lowest CPI inflation rate in 11 years

Inflation in Pakistan has fallen dramatically in FY4-15, with the pace of decline quicker than that of some regional peers. The decline is attributed to cheaper oil prices that fell by almost 50pc in the same period.

Source: World Bank Global Economic Prospects, Jan 2015
Source: World Bank Global Economic Prospects, Jan 2015

CPI inflation in FY14-15 is the lowest it has been over the 2009-2015 period at 4.8pc, falling drastically from previous year's 8.6pc.

Despite the sharp fall, Pakistan’s average inflation in the past five years is still slightly higher than the South Asian regional average (as shown below).

Source: World Bank
Source: World Bank

In addition to lower oil prices, the lagged effect of “monetary tightening” in 2013 (increased interest rates) led to an ease in inflation not only in Pakistan but also in India and Sri Lanka (World Bank GEP 2015).

But since then, the State Bank of Pakistan has been pursuing a loose monetary policy. Just a couple of weeks ago, the central bank slashed interest rate for a fourth consecutive time since November 2014— this time to a 42-year low of seven percent.

Interest rate has fallen 300 basis points between November 2014 and April 2015.

This is a clear sign of positive economic health, especially with regards to prices, such that the government now wants to spur economic activity without worrying about higher prices.

Finance Minister Ishaq Dar had welcomed the latest cut in interest rate: “The lowering of interest rate is a manifestation of improvement in macro-economic conditions as reflected in multi-year low inflation and considerably improved external account,” he said.

Tax-to-GDP: Ratio one of the lowest in the world

According to the PES 2014-2015, Pakistan's tax revenue as a percentage of GDP has declined significantly in the past year, from 10.2pc in FY13-14 to 7.5pc in FY14-15.

The latest survey also revealed that Pakistan's tax expenditure in the form of exemptions has increased 39pc over last year ─ from Rs477.1 billion in FY13-14 to Rs665bn in FY14-15 ─ despite the implementation of structural reforms to increase tax revenue ─ such as broadening the tax base and improving tax administration, which was a priority under the IMF Extended Fund Facility (EFF).

Not only Pakistan but other larger South Asian countries ─ such as India and Bangladesh ─ have struggled on account of tax revenue, with tax-to-GDP ratios declining or flat in the last decade.

In the March 2015 update on Pakistan’s sixth review under the programme, Pakistan met all quantitative performance criteria for end-December 2014 ─ except federal tax revenue which it missed by Rs22bn.

In the same country report, IMF notes that while tax revenue as a percentage of GDP may register a one percentage point increase this year owing to continued reforms, the ratio remains one of the lowest in the world and reforms in this regard need to persist.

Health: Expenditure increases but health-to-GDP ratio stagnant

According to the PES 2014-15, the government spent 0.42pc of GDP on health in FY14-15. While actual expenditure has been rising year-on-year, the health-to-GDP figure has been remained stagnant, for the most part, at under 0.5pc for decades.

Since government calculations of health as a percentage of GDP may vary from country to country depending on how health expenses are defined, using World Health Organisation (WHO) statistics seems a better way for cross-country comparisons of the metric.

As the table depicts, while all three South Asian countries’ expenditure on health as a portion of GDP has remained flat in the past few years, Pakistan’s average of almost 3pc is the lowest among the three.

This ignorance has translated into poor life expectancy rates not only for the region but for Pakistan in particular, which has the highest infant mortality rates among the three countries.

About half of under-five deaths worldwide occur in only five countries: India, Nigeria, Pakistan, the Democratic Republic of the Congo, and China (World Development Indicators 2015, World Bank).

Education: Literacy regresses

Pakistan's literacy rate fell two percentage points over FY13-14, according to the PES 2014-2015. Education expenditure as a percentage of the GDP also fell over the same period.

Average expenditure on education as a percentage of GDP has remained consistent at around 2pc for the period 2009-2014.

Gender disparity in education persists, with a difference of approximately 20pc or greater apparent between the sexes in both provincial and national literacy rates.

Source: PES 2014-2015
Source: PES 2014-2015

Pakistan's expenditure on education as a percentage of GDP has consistently remained low compared to regional and global averages, except for during 2007-2009 and 2011-2012, where it was on par with the South Asian regional average (as shown below)

Source: World Bank
Source: World Bank

PSDP expenditure: Majority of PSDP projects concentrated in Punjab

While the budget for the Public Sector Development Programme (PSDP) has increased steadily and significantly over the 2009-2015 period, actual PSDP expenditure fell marginally during FY13-14, with the most notable decrease apparent in total federal PSDP expenditure and Special Programmes.

A common trend observed during 2009-2014 with respect to PSDP expenditure is that the allocated PSDP budget is often higher than PSDP expenditure ─ except during FY11-12, where the latter was greater than budgeted PSDP.

Expenditure on Corporations, Earthquake Reconstruction and Rehabilitation Authority (ERRA) and Special Programmes was greater than the budgeted amount allocated to these PSDP heads in FY11-12, with ERRA expenditure over budget for two consecutive fiscal years ─ FY10-11 and FY11-12.

While actual expenditure was greater than budgeted expenditure in FY11-12, expenditure fell below budgeted PSDP in subsequent years, showing a sharp decline in FY13-14.

Despite the government’s emphasis on the need to meet various United Nations Development Programme Millennium Development Goals, a portion of the PSDP budget was only allocated towards meeting the MDGs for the first time in the 2009-2015 period in FY14-15.

New Development Initiatives (NDI) and Federal Development Programmes (FDP), Projects for Provinces (PP), and Special Areas (SA) were budgeted in FY13-14, but no expenditure was made on these initiatives during the same time period.

While the former (NDI) was only budgeted for in FY13-14, the latter (FDP, PP and SA) has not been budgeted for following FY13-14, and no expenditure has occurred in this head since FY11-12.

While Provincial Development Programmes (PDP) have consistently been allocated a portion of the PSDP budget over 2009-2015, there has been no expenditure on PDP during the time period.

A shortfall in expenditure of Rs39.55bn was recorded in the PES during FY13-14.

The majority of PSDP projects currently in the pipeline are in Punjab, followed by Sindh and Khyber Pakhtunkhwa.

The difference between actual and budgeted PSDP has, in the past, been attributed to a shortfall of revenue due to inadequate tax collection, deviation due to the need to meet the fiscal deficit ceiling, and release of most project funds after the third quarter of the fiscal year.

Correction: An earlier version of this story had a figure depicting budgeted CPI inflation instead of revised CPI inflation over 2009-2015. The error is regretted.