Budget 2019-20, CPEC and growth trajectory
The incumbent government presented its first formal budget of 2019-20 in June. The total budget outlay is Rs- 8,238.1 billion with 38.9 % higher than the size of previous budget. The target for expenditures is set at Rs 8,238.1 billion and Rs 3,462.1 billion for net revenues. For Public Sector Development Program (PSDP) the budget allocates Rs 1,613 billion out of which provinces share is Rs 912 billion. While Federal PSDP has been given the budget of Rs.701 billion where Federal Ministries/Divisions will receive Rs 348.2 billion. Considering the prevailing macroeconomic situation, the government has set somehow realistic targets for the year 2019-20. To achieve the growth target of 4 % the sectoral contribution is projected as 3.5 %, 2.3 % and 4.8 % for agriculture, industry and services sector respectively.
Current budget has been given in the background of complex economic situation where the primary focus is to stabilize the economy and combat inflationary pressure through tight demand management policies (monetary and fiscal policies). The major challenges economy at present is facing include spiralling inflation, dollar hikes, twin deficits and slow progress of industry.
The year 2018-19 remained economically challenging year where all the key macroeconomic and fiscal indicators somewhat not satisfactory. The real GDP in the year 2018-19 recorded at 3.3 % than its target of 6.2 %. Nearly all sectors failed to meet their targets. Agriculture as considered the backbone of country only contributed 19 % to GDP and performed way far below its target. It grew only 0.8 % against the target of 3.8 % mainly because of stagnant growth of major crops such as cotton, rice and sugarcane. Climate change, low quality inputs and less water availability were the main reasons behind declined production as per recent Economic Survey Reports. Similarly, industry which is the second largest sector, showed unsatisfactory performance. In the last year the target for industry was set at 7.6 % but achieved 1.4%. Large- and Small-Scale manufacturing registered meagre growth rates where mining and quarrying sector has witnessed negative growth rate (1.96%) mainly because of reduction in natural gas and coal (Economic Survey 2018-19).
Service sector provides steady support to Pakistan’s GDP. Although last year its growth was not at par with the target of 6.5 %, the sector performed comparatively better than agriculture and industry. The segments of Transport, Wholesale and Retail Trade showed positive trends and conferred overall positive impact on the sector. However, services performance is not impressive, and downturn of the sector can be a major risk to growth as it usually contributes significantly to GDP.
Keeping in view the sectoral performance and recent decelerating growth trend, Pakistan needs a major economic breakthrough. In this regards China-Pakistan Economic Corridor (CPEC) can potentially stimulate economic growth and may provide cushion to achieve the set growth target of 4 % through reviving the industrialization in Pakistan by synergizing through Special Economic Zones (SEZs) as well as aligned activities in various CPEC development projects. The decline in import bill for power generation and electrical machinery was observed on the completion of early harvest projects of CPEC. To ease the worsening trade deficit, CPEC can further improve the trade balance through import substitution and export promotion in priority SEZs (pSEZs).
The government seems to be very much committed to the CPEC as it has broadened the scope of initial project from 1 + 4 portfolio to “One Door Many Corridors “encompassing Trade & Market Access, Industrial Development & Global Value Chains, Socioeconomic Development & Poverty Alleviation, Agriculture Modernization & Marketing, Gwadar oil City & Blue Economy and Regional Connectivity & Third Country Participation. The Rs. 200 billion are reserved for CPEC plus other relevant projects in total budget. The CPEC is considered as a long-term development project spanning over 15 years period with multiple doors connecting China with Central Asia, Middle East, Africa and Europe. The budget has been increased by 30 percent more for CPEC as compared to ongoing fiscal year. It is believed that CPEC can act as major driver of growth in this current economic situation the country is passing through.
Pakistan is investment depressed economy. The country desperately needs investment led growth. In this regard, CPEC induced gross fixed capital formation can play important role. Huge inflow of US $60 billion investment under Employment Generation CPEC Program will generate massive economic activities and thereby employment opportunities. Apart from focusing on energy, infrastructure and Gwadar projects, 9 Special Economic Zones are being established under CPEC portfolio, that will revive industrialization process through Knowledge Spillovers, innovative businesses and entrepreneurial practices from foreign/Chinese’s businesses and possible technology transfers and transformation. To enhance productivity and develop human resource priority will be given to line up technical institutions and demand driven training with CPEC related skills and Special Economic Zones. The government has also planned development and investment projects under CPEC for other sub-sectors of industry such as management of the Mining Industry.
In agriculture more focus should be on crop diversification, valued crop cultivation, precision farming, mechanization, efficient irrigation system, reduction of water intensive crops in water deficient areas. Accordingly, possible business alliances/JVs with Chinese and foreign investors will set forth economies of scale in the sector. The presence of animal transboundary diseases namely Foot & Mouth Disease (FMD) seriously undermine the livestock production, the only sector achieved its target. Initiative of National FMD Control Program worth Rs.763.9 million can effectively be utilized under CPEC as China has shown interest to help overcome the FMD in Pakistan.
In budget the scope of CPEC has been extended including the socio-economic uplift of the society. The multidimensional CPEC projects will potentially boost the leading sub-sectors of the services namely transport, storage & communication, housing services (ownership of dwellings), finance & insurance and tourism & hospitality. Notably tourism sector will be strengthened through conducive environment owe to CPEC that will ultimately raise the socio-economic status of ingenious community.
The current budget is presented in very tough conditions and to bring the economy on right track and achieve the decent growth seems challenging. However, CPEC can turn out to be savior and can potentially stimulate the wide-ranged economic activities in the country and trigger economic growth. The effective utilization of allocated funds in the budget and proper implementation of CPEC projects can put the country on the path of sustained inclusive economic growth so that CPEC emerges as a “Gateway of Prosperity” for both Pakistan and China as well as the region at large.
The authors are Senior Research Fellow and Research Assistant respectively at Centre of Excellence for CPEC, Islamabad.
Pakistan is an investment depressed economy. The country desperately needs investment led growth. In this regard, CPEC induced gross fixed capital formation
can play important role.