The Survey


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Economic Survey for FY16 released on 2nd June, 2016, a day earlier than the budget for FY17, is a painful reminder that despite high-sounding pronouncements of the government, the economy of the country is still not on a take-off stage.

Real GDP which was targeted to grow at a modest rate of 5.5 percent fell short of the target by 0.8 percent and could only manage to grow at 4.71 percent. Both agriculture and manufacturing sectors failed to register the targeted growth rates of 3.9 percent and 6.1 percent, respectively, though services sector met its target of 5.7 percent during the year.

In fact, overall growth in the agriculture sector fell by 0.19 percent in 2015-16 due mainly to failure of cotton crop and a decline in rice and maize output. Noteworthy was the fact that the incumbent government has not been able to achieve the GDP growth rate targets fixed by its own team for the third consecutive year.

This speaks about the general tendency of the government to be overoptimistic or take an exaggerated view of the ground realities.

More disturbing was the development that savings and investment in the economy, which could propel the economy to a higher growth trajectory, continue to be at a dismally low level. National savings were estimated to be 14.6 percent of GDP, falling short of the target of 16.8 percent and marginally better than 14.5 percent of GDP in 2014-15.

The position of fixed investment was even worse as it declined from 13.9 percent of GDP in the previous year to 13.6 percent in FY16 and also missed the target of 16.1 percent by a huge margin. While public investment as a percentage of GDP grew marginally from 3.7 percent to 3.8 percent, private investment fell from 10.2 percent of GDP to only 9.8 percent.

Overall fiscal deficit was, nonetheless, curtailed from 8.2 percent in 2012-13 to 5.3 percent in 2014-15. It has been further contained to 3.4 percent of GDP during July-March, 2016 as compared to 3.8 percent last year. The reduction of fiscal deficit was also, more or less, in line with the target of 4.3 percent fixed for 2015-16.

Though some of the analysts continue to question the veracity of fiscal data released by the government, still the containment of overall deficit in such a short time is no mean achievement. FBR’s tax collections at Rs 2,103 billion during the period under review were higher by 18.5 percent than Rs 1,775 billion in the same period of last year.

As for monetary policy, discount rate was gradually reduced from 10.0 percent in November, 2014 to 5.75 percent in May, 2016. Private sector credit gained momentum and expanded by as much as Rs 294.4 billion as against its expansion of Rs 168.4 billion last year.

Money supply (M2) rose by 7.5 percent from 1st July, 2015 to May 13, 2016 as against the increase of 8.2 percent in the corresponding period of last year. The government has also been quite successful in containing inflationary pressures in the economy. CPI inflation declined from 8.62 percent in FY14 to 4.53 percent in FY15.

During July-April, 2016, inflation has been contained to 2.79 percent which was the lowest in the last 13 years. In the external sector, current account deficit contracted by 17.7 percent during July-April, 2016 to dollar 1.5 billion as compared to dollar 1.8 billion in the corresponding period of last year and the country’s total foreign exchange reserves reached the highest level of dollar 21.4 billion by 18th May, 2016.

Overall trade deficit, however, posted an increase of 2.1 percent during July-April, 2016 due to higher decline of 9.5 percent in exports than 4.7 percent in imports. Public debt has increased enormously over the last few years. Total public debt which was Rs 14,318 billion in 2013 has reached Rs 19,168 billion by 2016. External public debt now constitutes 55.1 percent of GDP as against 48.1 percent in 2013.

As the Economic Survey for 2015-16 shows, economy of the country has shown a mixed performance during the year. The gains have been quite palpable in the case of price stability, fiscal outcome and external sector of the economy.

While easing of inflationary pressures in the economy would give some respite to the common man, gains in the external sector have resulted in building foreign exchange reserves, ensuring solvency of the country and maintaining a stable exchange rate. It also goes to the credit of the government that it has tried to maintain proper fiscal discipline and kept the FBR on its toes to mobilise a higher level of tax resources.

This has helped the monetary policy of the country in a number of ways. As a result of enabling environments provided by the government in the form of a substantial reduction in the inflation rate and tightening of fiscal policy, monetary policy has got the necessary space to ease the interest rate structure in the economy and expand private sector credit to revive industrial and business activities in the economy.

A consistent movement in this direction could pave the way for macroeconomic stability.

However, it is not possible to ignore that there are still huge challenges confronting the economy. At the present rate of GDP growth and increase in population, one can easily see that it would take decades for the per capita income to rise to a level which would be able to lessen poverty and ensure a reasonable standard of life to a large part of the population.

In the meantime, most of the other countries would move to levels of prosperity which would be far ahead of Pakistan’s. Most worrisome is the fact that fundamental factors like adequate savings and investment, technical know-how and advanced education which could improve the growth rate of an economy are scarce in the country. In a situation like this, it is hard to imagine that growth rate of the country would jump to a level on a sustained basis to ensure a reduction in unemployment and poverty in the years to come.

The agriculture sector which is the mainstay of economy is still greatly dependent on favourable weather conditions and the severity of pest attacks in a particular year. A favourable outcome in the external sector is also partly due to exogenous factors. Obviously, if oil prices in the international market would not have dropped by such a big margin, current account of the country would have been under stress and prices in the domestic market would have been under more pressure.

Given the present economic difficulties in the oil exporting countries like Saudi Arabia, home remittances could decrease in future. Huge external payments are due after a year or two which could put more pressure on the external sector. The country is also coming close to a debt trap. Fiscal effort of the country has always been half-hearted. The present government has tried to do its bit on this front but has not been able to broaden the tax base and ensure an equitable fiscal regime.

It has also not been able to eschew the lust for more visible projects undertaken largely for political expediency. Losses due to incidents of terrorism are estimated at nearly dollar 107 billion up to now and this haemorrhage to the economy is likely to continue for an unspecified period. Overall, we feel that the government has still to initiate a host of reforms and take a number of unpopular decisions to steer the country towards macroeconomic stability and higher growth trajectory.

Whether the government would have the appetite to do it, time alone would tell.

Source: Business Recorder