EDITORIAL (June 11 2009): The Economic Survey 2008-09, a copy of which was published in the newspaper yesterday - prior to its formal launch, contains no surprises. The entire set of macroeconomic indicators revealed in the Survey were being cited constantly, as and when available, as they were required during critical quarterly negotiations with the International Monetary Fund (IMF) staff to assess whether targets set for the programme were met - a requirement for the release of the next tranche.
Thus the scaling down of the growth rate, from 4.5 percent target to 2 percent was already known. What however was not known was the fact that this growth rate was the lowest in the region: Bangladesh had a growth rate of 5 percent, India 4.5 percent and even Sri Lanka experienced a growth rate of 2.2 percent.
In effect external factors alone, namely global recession, cannot account entirely for the disparity in growth figures between South Asian countries which largely produce similar products and therefore are competitors in the world market. The main reason behind the slippage in growth according to the Survey is the "massive contraction in the industrial sector."
The list for this dismal performance is rather exhaustive: "major disruptions of extraordinary nature like political uncertainty hovered around for most part of the year, intensification of war on terror, acute energy shortage and a plummeting exchange rate with extremely high inflation by Pakistan's standard, massive adjustment efforts to regain stability from a highly disruptive year (2007-08) of exceptionally high macroeconomic imbalances, and above all significant demand compression both on domestic and external front."
No one can challenge the multiplicity of factors that have negatively impacted on the manufacturing sector with large scale manufacturing registering a negative 7.7 percent growth rate during the year. Major contributors to this decline were: automobile group (negative 39.0%) followed by electrical (negative 31.3%), petroleum (negative 9.2%), food, beverage and tobacco (negative 10.5%), steel products (negative 5.62%), tyres and tubes (negative 4.0%) and textile (negative 0.73%).
The textile sector most affected by the global recession witnessed a decline of 7.6 percent in its export performance with cotton yarn's export performance declining by 15.5 percent, bed wear declining by 11.7 percent and ready made garments by 13.1 percent. The Survey looked at four public sector corporations and excluding Pakistan Steel noted that production value of all operating units under three corporations (NFC, PACO and SEC) decreased by 32.90 percent against the same period last year.
Privatisation never did become the focus of the present government, a lack that appears to be steeped in PPP's ideology. Small and medium enterprise sector mainly include wholesale and retail trade and restaurant and hotel sectors. This sector too suffered due to law and order problems in the country. Mining and quarrying registered a flat growth of 1.3 percent however given the potential of this sector this flat rate can be viewed as continued failure to develop this sector.
Services sector's contribution to GDP grew by 3.6 percent against a target of 6.1 percent and last year's actual growth of 6.6 percent. The reason the Survey argues is "due to poor show of the financial sector beside saturation level attained in the communication sub-sector". The GDP growth rate is largely accounted for by the agriculture sector and the output of major crops mainly wheat, gram and rice.
The reason can be partly accounted for by higher than the average rainfall this year during the monsoon season as well as during the winter season. The increase in the support price of wheat was instrumental in many a farmer cultivating the crop. In addition July-March credit to the farm sector rose by 9.6 percent in 2008-09 in marked contrast to negative 34.7 percent in the corresponding period last year.
But what is of great significance is not the green tractor scheme, where price differential between local and imported tractors has become an issue, or higher credit to the subsistence farmers but to the crop insurance scheme that would be mandatory for all the five major crops and the government would bear the premium for the subsistence farmers up to a maximum of two percent per crop. However this scheme has not yet been launched.
Total investment increased by average around 19.7 percent - a decline from last year's growth of 22 percent. The Survey acknowledges that "gross fixed capital formation could not maintain its strong growth momentum and real fixed investment growth contracted by 6.9 percent."
A decline in investment has a multiplier effect on the growth rate and it is little wonder that the growth rate declined to two percent. Foreign direct investment (private) showed more resilience and stood at $3205.4 million during the first ten months (July-April) of the current fiscal year as compared to $3719.1 million in the same period last year thereby showing a decline of 13.8 percent.
Private portfolio investment on the other hand showed an outflow of $451.5 million as against an inflow of $98.9 million during the comparable period of last year. National savings rose marginally to 14.3 percent from the previous year's figure of 13.5 percent in spite of the rise in interest rates by the National Savings Centres.
The reason could well be that with inflation at over 20 percent, with food inflation over 25 percent, and with the withdrawal of subsidies on oil and products, including energy, negative growth in large scale manufacturing that impacted negatively on employment levels there was simply not enough disposable income that could be saved for future consumption.
Thus it is no wonder that the Survey notes that "consumer spending remained strong with real private consumption rising by 5.2 percent as against negative growth of 1.3 percent attained last year". Foreign currency debt rose from 40.7 billion rupees in 2007-08 to 43.8 billion rupees in 2008-09. This rise is about average with foreign currency debt at 36.75 billion rupees in fiscal year 2007 and 33.9 billion rupees in 2006.
Rupee debt as was expected under the IMF programme declined from 54.4 billion rupees in 2007-08 to 51.6 billion rupees in 2008-09. The Survey pointed out that "due to sustainable debt policies and favourable rescheduling of debt, external debt and liabilities (EDL) as a percentage of GDP declined from 51.7 percent in end-June 2000 to 28.3 percent by the end of June 2007 (Musharraf era).
By end-March 2009, EDL as a percent of GDP stood at 30.2 percent, increasing by 2.1 percentage points." This is a disturbing trend indeed. In addition the Survey notes that interest payments exceeded the budgeted level by 61 billion rupees, a situation that is unacceptable as interest payments are on past loans and failure to budget for these payments can be seen as indicative of deliberate misrepresentation on the part of the government.
And finally the tax to GDP ratio did not improve due to mainly "structural deficiencies in the tax system and administration, both at the federal and provincial government levels." This was identified by the government in its Letter of Intent submitted to the IMF Board prior to the release of the stand-by facility and unfortunately it remains an issue almost seven months down the line. This is the area that needs urgent targeting in the forthcoming budget for fiscal year 2009-10.
Another disturbing development, apart from growth, low savings and investment and increased indebtedness, was that inflation is still stubbornly high despite a very tight fiscal policy followed during the year under the advice of the IMF. A high inflation, particularly in the food group, along with rampant unemployment and rising poverty is devastating for the ordinary people and a kind of alarming bell for the policy makers.
This also raises the question regarding the efficiency of strict demand management in ensuring financial stability in the country. The argument both in favour and against strong demand management are now voiced openly and even Asian Development Bank has now joined the debate and argued against the strict policy framework prescribed by the IMF under SBA.
Hopefully, the Ministry of Finance and the State Bank would try to take a more balanced view during 2009-10 in order to reconcile various objectives to spur growth with price stability and mitigate the problems of common man, who seems to be on the verge of losing patience. We know the difficulties of the government when it is faced with so many challenges but major slippages on the economic front at this juncture could be very harmful and compound the problems further.
