With the ministries of finance and planning on the same page, the production sectors are expected to be placed at the centre of the forthcoming federal budget growth strategy in a bid to put the economy on a sound footing.
In recent decades, economic growth has predominately been driven by consumption while on the supply side, the contribution of investment, production and exports to GDP expansion has remained much below their potential.
The domestic demand is met with huge imports of foreign goods and services that have no share in GDP. Though the inflows of workers’ remittances have positive effects on economic growth, it is primarily through the consumption channel, while the investment channel is not found significant, say a working paper central bank researchers Sarmad Ellahi and Muhammad Omer.
Federal Planning Minister Asad Umar says that the PTI government is trying to follow an economic model of sustainable growth by relying on production sectors of the economy.
Challenges apart, the important thing is that production is the key source of stable economic growth
Referring to the National Accounts Committee’s (NAC) provisional estimate of the economic growth rate of 3.94 per cent for 2020-21, Umar told in a news conference: “This growth has come from the production sector and not the consumption sector.”
Finance Minister Shaukat Tarin told the Institute of Policy Reforms recently that the government would provide incentives to 12 production sectors in the coming federal budget that have been identified to achieve inclusive and sustainable growth.
The second meeting of the Economic Advisory Council on June 1, chaired by Mr Tarin, agreed to extend the fixed cheaper power rate to industry till October 2023.
Targeting a growth rate of 4.8pc for the next year, the Annual Plan Coordinating Committee (APCC) expects the agricultural production to grow 3.4pc, industrial output 6.8pc, manufacturing 6.2pc and, services by 4.7pc.
Industrial investment in Special Economic Zones (SEZ) is being incentivised. At the commercial launch of the Rashakai SEZ, Prime Minister Imran Khan directed the Khyber Pakhtunkhwa Chief Minister Mahmood Khan not to sell and instead give plots to industrialists on cheaper leases. He said, “selling plots push their prices so high that it stopped being profitable for investors. Speculative selling of land is a big hurdle in the way of industrialisation.”
Because of its strategic location, Mr Khan has directed that export-oriented industries should be preferred in the Rashakai zone. To incentivise value-added exports, Mr Tarin says the government has decided not to apply a 1.5pc turnover tax in SEZs.
The State Bank’s policy rate at 7pc has been kept unchanged to support economic growth. The SBP says it would begin to normalise the monetary policy when recovery becomes more durable and the economy returns to full capacity.
On June 2, the central bank reduced the risk weight on banks and development finance institutions from 200pc to 100pc on their investment in units of Real Estate Investment Trusts for five years to facilitate the development of housing finance and capital market.
But the greatest challenge to growth lies from the external pressures it creates. Mr Umar admits that “ the more you grow, the higher will be your current account deficit.”
Imran Khan says industrialisation would save the country from a debt trap. External accounts become unsustainable as the growth rate starts moving above 4.2pc, according to a study by the State Bank by Bilal Raza.
Covering a period of 1980-2017, the report shows that Pakistan cannot sustain high economic growth because of the balance of payments constraints on effective demand.
The study also notes that declining terms of trade put significant downward pressure on economic growth. In fact, the deteriorating terms of trade are the largest negative contributor towards the balance of payments constrained growth. The report stresses the need for a successful import substitution policy that should precede the export-oriented strategy for economic growth.
The country’s trade deficit during July-May has widened by 29.5pc to $27.275 billion from $21.065bn over the corresponding 11 months of the previous fiscal year. In May, the gap surged by 134pc.
While monetary and fiscal policies have helped the production sectors of the economy recover from the impact of the first wave of coronavirus and lockdown, the commodity-producing sectors, according to NAC’s provisional estimates for this fiscal year, are expected to grow by 3.17pc, lower than 4.4pc in the services sector.
The share of agriculture in GDP dropped from 19.41pc to 19.19pc, the contribution of the industry fell from 19.19pc to 19.12pc and that of the services sector increased from 61.39pc to 61.68pc.
Mr Tarin says the first priority in the next budget will be to raise tax revenue and the second priority will go to boosting development spending. With the policy focus shifts to growth, the International Monetary Fund stability and austerity programme is being renegotiated to moderate its space, while the planning commission is proposed to be strengthened.
The annual budgeted Federal Public Sector Development Programme (PSDP) has been increased from Rs650bn to Rs900bn. The key objective of the PSDP, Umar said, was to have equitable and balanced growth and combat the adverse impact of the ongoing Covid-19.
Against Rs650bn, the actual spending during nine months of this fiscal year stood at Rs270bn. Asked at his press conference whether the government would be able to utilise Rs900bn, Mr Umar conceded that there were serious absorption capacity issues. He admitted that “the business as usual will result in the lapse of the development funds”.
In the first three quarters of the current fiscal year, actual uplift spending by both the federation and the provinces amounted to only Rs660bn against a budgeted outlay of Rs1.5 trillion. The next year’s budget proposes to raise the development expenditure to Rs1.9tr.
The outlook for tax revenues has improved with a record collection of Rs4.17tr in the first 11 months of this fiscal year by the Federal Board of Revenue (FBR). But the FBR faces an uphill task to collect Rs790bn in June to achieve the annual target. The projected increase in tax collection of Rs1trn next year seems to be a very ambitious target.
The APCC has proposed Rs1tr for provinces’ development budgets for 2021-22 whereas in nine months of 2020-21 they together managed to spend Rs390bn.
On the other hand, the finance ministry’s revised budget strategy paper 2021-22 expects the provinces to create budget surpluses of over Rs500bn — more than double the current level — to help keep the consolidated deficit at 6.3pc of GDP. The federal fiscal deficit is estimated at 7.3pc.
Challenges apart, the important thing is: production is the key source of stable economic growth.
Published in Dawn, The Business and Finance Weekly, June 7th, 2021