Is this really growth?

Published May 24, 2021
It would be interesting to compare provisional results with budget targets to see where the economy outstripped the government’s estimates.
It would be interesting to compare provisional results with budget targets to see where the economy outstripped the government’s estimates.

“If you stick a knife in my back nine inches and pull it out six inches, that’s not progress. If you pull it all the way out, that’s not progress. Progress is healing the wound that the blow made. They haven’t pulled the knife out,” Malcolm X, an African-American revolutionary, said these words decades ago — albeit against a different background. But the idea holds true for Pakistan’s nascent macroeconomic recovery.

The incumbent PTI came to power weeks after the country posted an economic growth rate of 5.8 per cent for 2017-18, which was later revised to 5.53pc. The five-year average stood at an almost 4.7pc per year. The growth rate for 2017-18 — the highest in that decade — was supported by 4pc growth in agriculture, 5.43pc in manufacturing and 6.35pc in services.

The National Accounts Committee (NAC) last week estimated Pakistan’s provisional GDP growth for the current fiscal year (2020-21) at 3.94pc, supported by a broad-based recovery in major sectors — 2.77pc in agriculture, 3.57pc in industry and 4.43pc in services.

The three-year average GDP growth thus works out to be about 1.8pc — 1.9pc, -0.47pc and 3.94pc. With an average population growth rate of over 2.2pc, real annual economic growth turns out to be -0.4pc — or a cumulative 1.2pc contraction.

It was beyond all expectations and surprised many. Even the Ministry of Finance and the State Bank of Pakistan (SBP) were limiting their hopes to no more than 3pc of GDP growth rate. They raised their concerns about exaggerated numbers during the NAC meeting as well and reserved their reservations about fixed capital formation in a low-investment year.

Per capita income of $1,543 is just above $1,529 recorded in 2015-16 and well below $1,630 in 2017-18

The low-base effect appears to have played a key role as well as the better-than-anticipated wheat output as data for other major crops was already available. The growth rate for last fiscal year was revised further downward to -0.47pc from -0.38pc announced earlier. The results significantly outstripped the government’s targets and put a question mark on the assessments of multilateral lending agencies closely working with national authorities. The closest estimate was from Asian Development Bank (ADB) at 2pc, followed by the IMF (1.5pc) and the World Bank (1.3pc).

That generally means the country would perhaps need at least another year or so to reach the level it was at three years ago. While Covid-19 aggravated the situation, there are no firm estimates as to how many people might have fallen below the poverty line, lost their jobs and wasted precious days of their lives.

What official data released by the Ministry of Planning and Development that finalised the national accounts confirms is the fact that per capita income estimated at $1,543 was just above $1,529 in 2015-16 and well below $1,630 in 2017-18, just before the downhill journey started. The per capita income had dropped to $1,459 in 2018-19 and further down to $1,361 in 2019-20. The size of that stood at $315 billion in 2018 and is now reported to have recovered to about $295bn this year from $264bn last year.

The good sign is that from a low base of negative growth, almost all sectors are now on a recovery path. This is apparent from 8.7pc growth in the manufacturing sector this year from almost equivalent 7.4pc contraction last year on top of 0.69pc negative growth in the first year of the PTI government.

The commodity sectors that have been growing at a varying rate of 2-4.3pc in the 10 years since 2008 had contracted by 0.54pc in 2018-19 followed by 0.33pc in 2019-20. They have recovered this year to 3.17pc growth.

The services sector that has always maintained health growth rates since at least 1952 with recent peaks of around 8pc in 2005 and 2006 and then over 6pc in 2016 and 2017 declined to 3.8pc in 2018-19 and contracted by 0.55pc last year. Fortunately, it has also recovered to 4.43pc growth even though some of the major service subsectors like tourism and transport apparently operated below potential.

The gross capital formation that has generally remained in healthy double digits over the past decade contracted by 0.81pc in 2018-19 and then recovered close to 7pc growth last year and almost doubled to 14pc this year.

It would be interesting to compare provisional results with budget targets to see where the economy outstripped the government’s estimates. To begin with, the government, keeping in mind the uncertainty about the severity and duration of the pandemic, had set an economic growth target of 2.1pc in last year’s budget. The provisional performance turns out to be almost double the target at 3.94pc.

This was based on the agriculture output target of 2.8pc while the actual number comes to 2.77pc. The major surprise in this sector is 4.65pc provisional growth over last year against a targeted growth of 1.9pc — more than double. The worst shock came from cotton ginning that contracted by 15.58pc this year against a targeted growth rate of 0.9pc.

Livestock, forestry and fisheries were targeted to grow by 3.5pc, 2.1pc and 1.5pc, respectively, but all three stood short of target and grew 3.06pc, 1.4pc and 0.73pc, respectively.

In overall terms, a major recovery was witnessed in the industrial sector because of the low-base effect of last year’s 3.8pc negative growth. The industrial sector posted healthy growth of 3.6pc against a target of just 0.1pc. Here, the surprise setback of 6.5pc contraction was witnessed in mining and quarrying against a growth target of 0.5pc. This is a major shock as mining and quarrying had contracted by more than 8pc even last year.

But then, it was more than compensated by a robust 9.3pc growth in large-scale manufacturing (LSM) against a targeted 2.5pc contraction given a 10pc contraction last year and almost 3pc a year earlier. Small-scale manufacturing also grew 8.3pc this year against a target of 6pc growth when compared with a paltry 1.5pc growth in 2019-20 against the average 8pc 1999-2000 onwards.

Another surprising positive development came from 4.4pc growth in the services sector against a target of 2.6pc — a sector that contracted by 0.55pc last year and grew by just 3.8pc a year earlier. Interestingly, wholesale and retail trade posted 8.4pc growth against the 1.1pc target mainly because of the low-base effect of 4pc contraction last year. This shows the potential here again is significant when considered in the context of sub-optimum business and trade operations owing to Covid-19 restrictions.

Finance and insurance also posted a robust 7.8pc growth against a target of 3pc and last year’s performance of just 1.1pc — again a low-base effect and on the back of government and central bank support to big businesses as apparent from their improved profitability.

The housing sector’s growth was exactly on 4pc growth target while government services were seen struggling at 2.2pc against a target of 4.6pc apparently because of a freeze on government salaries and curtailed development spending.

Interestingly, there were some minor changes in the share of major sectors in the size of GDP. The share of agriculture dropped from 19.41pc last year to 19.19pc. The industrial sector also lost its share in GDP from 19.19pc last year to 19.12pc this year. The services sector gained its share in GDP from 61.39pc last year to 61.68pc this year.

Published in Dawn, The Business and Finance Weekly, May 24th, 2021

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