LAHORE - Pakistan economy continued to miss most of its targets each year and the government is not ready to draw any lesson to take serious measures to achieve high growth target.
This was stated in a report of economic performance released by the Institute for Policy Reforms (IPR). IPR said that there would be no cause for celebration even if the economy had achieved its growth target. It is more important to change the fundamentals underlying growth and the macroeconomic framework. It did not agree with the government’s claim in the Pakistan Economic Survey of a turnaround based on a “comprehensive programme of economic revival.” The report also stressed that continued fiscal and current account deficits are real sources of concern. The economy stands on weak pillars, the report said.
Looking at headline numbers, the report analysed why they do not improve. GDP growth rate of 5.28 percent is shy of its target of 5.7 percent. The contribution of industry and agriculture was 1.74 percent, while services contributed 3.54 percent. Recall that agriculture’s modest 3.46 percent growth this year is from last year’s low base when crop production declined.
In nine months, the fiscal deficit has already breached its target of 3.8 percent for the year. IPR forecasts that it will be about 4.5 percent of GDP by year end. The current account deficit was worse. Compared to a target of $4.5 billion for the year, it was $7.25 billion in April and would end up at about $8.5 billion, nearly twice government’s projection. This is unsustainable. When this happens, usually Pakistan goes to the IMF. “Alternately, we may rely on China’s largesse, but the country must know on what terms,” the report said.
Both GoP and IMF had forecast current account deficit of 1.5 percent of GDP. The fiscal deficit is high for several reasons. The government revenue will be well below target, expenditure on debt servicing will be high, and less than estimated provincial surplus.
The GoP had set a target of Rs4,916 billion for total revenue and Rs3,621 billion for FBR revenue. Low energy prices, low mark-up rates, and fall in Coalition Support Fund payments mean that overall government revenue for the year will be short by Rs500 billion to Rs600 billion. FBR revenue will be short by about Rs120 billion for the year. This is less than the concessions of about Rs150 billion granted by the GoP, including reduction in corporate tax rates. Effectively, FBR would have achieved its target after a 20 percent increase last year.
On the expenditure side, foreign debt servicing has reached Rs85 billion in 2016-17 and will almost certainly exceed this year’s target of Rs113 billion. Clearly, recent high mark-up loans have begun to have an effect. This problem will only grow with increased debt from China.
This has implications also for the current account deficit. Export performance and weak workers’ remittance are a special concern. Exports are expected to be $21.5 billion compared to the target of $24.75 billion.
They have fallen sharply from $25.1 billion in 2014-15.
The government’s belated incentives for exporters have not had an effect. Pakistan will have to change its industrial structure and be part of the global supply chain, if exports are to grow. Workers’ remittances also will be 2 percent below last year, instead of the targeted growth of 5 percent. FDI will touch $2 billion against a target of $4.6 billion.
Savings and investment are well below target. They must increase for the economy to grow. Investment to GDP ratio is 15.8 percent this year against a target of 17.7 percent. Savings rate was 14.3 percent against the target of 16.2 percent. It fell from last year. Power supply and other public services continue to be an issue.
Pakistan will attract very large investments from China in coming years. This is the opportunity for a period of long-term economic growth. This requires increase of savings and investment, control on twin deficits, workers skills training, R&D, and infrastructure. It needs governance reforms to support business activity.
IPR also questioned PBS’s method for preparing national accounts and estimating growth rates in the national accounts. Several assumptions increase GDP growth estimates. IPR recommends a review of accounting methods.