Three years into the pursuit of macroeconomic stabilisation policies under the aegis of an IMF programme, the PML-N government announced a transition to a “pro-growth”, “investment-friendly” budget for 2016-17 presented last year.
The official Economic Survey, to be released later today, will give an indication whether the government has been successful one year later in shifting the economy into a higher gear and lifting it from its low-growth equilibrium of the past several years. Reports in the media quoting provisional figures compiled by the National Accounts Committee and presented to the National Economic Council in its meeting of May 19, indicate that real GDP growth is likely to be 5.3 per cent for the current fiscal year (2016-17), below the government’s target of 5.7pc. The revised figure for economic expansion in 2015-16 was 4.5pc.
The agriculture sector is expected to have recorded growth of 3.5pc in 2016-17, largely on the back of a rebound in the cotton crop, while industrial growth is provisionally estimated at 5pc, against a target of 7.7pc. The services sector is estimated to have expanded by 6pc in the current fiscal year. While the official target for growth in GDP for the current year is likely to have been missed, the government can claim some comfort from the provisional increase recorded in the overall size of the economy. The 5.3pc growth in GDP is the highest in the last ten years (since 2007).
However, the good news appears to stop here. A closer look leads to the following observations:
The lift in economic growth has come disproportionately from the services sector, with a turnaround in major crops from the disastrous season the previous year also providing strong upward support (a positive base effect). The country’s manufacturing base, especially the export sector, has remained under stress due to government policies, with the finance minister unable or unwilling to loosen his suffocating death grip on these key sectors.
Minus the services sector, the rest of the economy (referred to as the commodity-producing sector) grew an estimated 1.9pc in the outgoing year.
With the agriculture sector’s strong linkages with both services as well as manufacturing, its substantial contribution to overall growth indicates that GDP growth was more Providence-provided than policy-induced. The investment rate, a key indication of whether an economy has actually turned the corner or not, has failed to increase and remains subdued despite work on CPEC being in full swing. Private investment to GDP remains in the doldrums at a reported 9.9pc, well below the government target of 12.2pc for the year.
The private sector is voting with its feet on PML-N economic policies, as demonstrated both by its holding back on new investment as well as its indication of low business sentiment going forward. The latest read out from the OICCI’s business confidence survey for April 2017, indicates a continued fall in confidence levels from last April’s peak of — 36pc to — 13pc. The manufacturing sector indicated a low level of confidence, at only — 9pc.
Tellingly, respondents to the April survey foresaw a “significantly reduced level of capital investments (-17pc) in the next six months as compared to the plans in the previous survey”. At a stage where the CPEC project cycle should be visibly drawing in substantial investment from the country’s private sector, the negative outlook regarding future investment decisions by businesses should be a cause for concern.
A large part of the problem is that the PML-N government does not have a coherent framework for economic growth, nor is it relying on the right instrument in this case (higher public spending). While a relatively small but significant portion of the PSDP is allocated to CPEC early harvest projects, which are growth-enhancing for the most part, the bulk of the development spending is on projects that have either tenuous or too marginal and diffused positive effects on economic growth.
Businesses have been over-burdened by Mr Dar’s ill-thought out and downright damaging tax policy, and until this basic fact is understood and rectified, there is little likelihood of a return to durable long-run growth underpinned by a significant turnaround in private investment.
Published in Dawn, May 25th, 2017