Written By M. S. Qazi
The economy is projected to grow at 4.2 per cent during FY 2011-12 against actual growth of 2.4 per cent during the outgoing year. Achieving 4.2 per cent growth in the backdrop of past three year’s average low growth rate of 2.6 per cent, double-digit inflation of 15.5 per cent and without substantial positive developments in the macroeconomy would prove to be very challenging. The government put the blame squarely on last year’s floods for low economic growth, but what it failed to do was curb corruption and mismanagement of public funds within government ministries/departments and the FBR to keep the PSDP intact, which could have helped in achieving the growth target.
Hardly any sector of the economy besides exports and remittances showed a significant improvement during outgoing fiscal year. According to the Economic Survey (ES) 2010-11, “During outgoing fiscal year, the agriculture sector was expected to grow by 1.2 per cent against the target of 3.8 per cent and overall industrial sector faced severe power and gas shortages and was expected to decline by 0.1 per cent against the targeted growth rate of 4.9 per cent. Large-scale manufacturing (LSM) was expected to post a modest growth of 1 per cent despite energy shortages and decline in foreign direct investment.” The Quantum Index of Manufacturing (QIM), July- March, unveiled that negative growth was witnessed in food (-2.3 per cent), petroleum products (-4.8 per cent), and fertiliser (-6.8 per cent). The overall picture of the industry remains unsatisfactory and a negative growth of 0.1 per cent is expected against the target of 4.7 per cent. Electricity, gas and water supply growth worsened at minus 21 per cent. National savings rate and investment, the critical factors for stimulating economic growth have fallen short of their targets. As revealed in the ES, these are anticipated to be 12.9 per cent of GDP against the target of 14.5 per cent, 13.4 per cent as compared to 17.9 per cent of GDP. Foreign direct investment (FDI) for July-March 2010-11 witnessed a decline of 29.2 per cent respectively and investment in stocks crashed by 33.0 per cent. PSDP of Rs280 billion for the federal government was slashed by Rs90 billion to reduce fiscal deficit.
In addition to the above stated factors, a number of additional factors such as exogenous shocks, global financial meltdown and rise in international commodity prices and devastating floods of August 2010 have contributed to a meagre growth rate in the last three financial years. But, more critical than these factors are the long-term structural imbalances in the economy, tight monetary policy and expansionary fiscal policy, energy crisis, and uncertain political and security environment that have reduced the prospects for increasing economic growth. One of the most relevant questions is: would it be possible to achieve the projected growth target without improving the factors mentioned above in the upcoming fiscal year? The finance minister expressed optimism but did not contribute anything viable that could help to boost growth, especially in manufacturing and agriculture sectors.
Pakistan needs to accelerate its growth rate and sustain it long enough to give an impetus to the shrinking job market. A critical element to attain higher growth is revival of domestic and foreign investment, which in the past three years dwindled by a large extent. Consequently, Pakistan’s growth rate is only 2.5 per cent while the regional average growth is expected to grow by 8 per cent in 2011.
PSDP plays a key role in stimulating the economy as it prepares ground for investment. The budgetary allocation for a consolidated PSDP (federal plus provincial) in 2010-11 was Rs663 billion without giving due consideration to availability of financial resources to meet the expenditure. Inflows from IMF were constrained because of the SBA programme’s suspension from May 2010. The next tranches are unlikely to be released unless the government takes positive measures to reduce fiscal deficit to 4.0 per cent of the GDP during fiscal year 2011-12. IMF officials remained unconvinced about measures taken by the government till now to improve fiscal indicators during their meeting with the national economic managers from May 11-17, 2011 in Dubai.
The new budget proposes PSDP expenditure of Rs730 billion, with a fiscal deficit of Rs850 billion, mostly to be financed through domestic borrowing. The share of the federal government is earmarked at Rs300 billion while the provincial share is Rs430 billion. How would the federal and provincial allocations for PSDP help to boost economic growth? It is not clear because the provinces have yet to prove their ability to fully utilise huge funds that are being made available to them under the 7th NFC award. PSDP could have a positive impact on growth provided two developments take place simultaneously: one, the government does not resort to slashing PSDP to reduce fiscal deficit as it has been doing so in the last three years. Two, it does not resort to borrowing from the central and commercial banks because these measures would fuel inflation and crowd out private sector borrowings.
In order to boost economic growth on a sustainable basis, fiscal woes have to be addressed through documentation of economy which neither the ruling government nor its coalition partners are interested in doing so. Budgetary proposals have hardly focused on this important aspect. The second very crucial issue is to resolve the energy crisis on a priority basis. The circular debt and persistent increase in the cost of electricity under IMF pressure every now and then have serious implications for industrial and agriculture growth. Lastly, restructuring and privatisation of state-owned entities is long overdue but despite repeated promises made in the last budget, there has hardly been any progress. The new budget has hardly focused on these pivotal issues to achieve high growth trajectory.