Pak misses most economic targets in outgoing FY

Ishfaq A Mughal

The Government of Pakistan on Friday lauched the Economic Survey 2010-2011 and cinfirmed that economic (real GDP) growth was restricted at 2.4 per cent during current fiscal year against a target of 4.5 per cent due to bad affect of flood devastation and terrorism.

Taxation reforms and reduced energy sector subsidies were essential for limiting deficit to less than 4 per cent of GDP so that the suspended International Monetary Fund programme could be revived. “More work will be required to rebuild the reforms programme,” Finance Secretary Dr Waqar Masood Khan said.

However, the government, which has spent most of this year struggling to introduce reforms, tried its best to display political will. “Our stand is that everybody earning income beyond a certain level should pay the taxes irrespective of the source (of income),” asserted Finance Minister Abdul Hafeez Shaikh at the launch of the economic survey on Thursday, a day before presentation of federal budget in the National Assembly.

He explained that the fiscal deficit at one time was anticipated to touch 8 per cent of GDP this year against a limit of 4 per cent; the government brought it down to 5.1 per cent by controlling expenditure and mobilising resources in March. However, he added, the amount the government had to fork out after March for circular debt had taken the deficit up to 5.7 per cent.

In fact, according to the survey, the deficit increased to 5.9 per cent from 5.3 per cent. Claiming that the government was striving hard to win political support for ownership of critical and sustainable reforms in the taxation and power sectors, the survey said the domestic environment was “still affected by intensification of war on terror and volatile security situation”, while the external environment was affected by “uncertainties surrounding external inflows and oil prices”.

Indeed, if political will for reforms was one theme of the survey, the second was the repeated focus on factors beyond the government’s control that led to such a poor economic performance. The floods, the war, the international oil prices, energy shortages — each one was repeated ad infinitum.

“The economy lost significant growth momentum during the last three years as the economic growth averaged just 2.6 per cent as against 5.3 per cent in the preceding eight years,” the survey said.

“The Pakistan economy still faces pressures from higher inflation driven mainly by spike in food prices, acute power shortages, modest growth in tax revenues amidst rising security related expenditure… lower than anticipated inflows,” it conceded.

The economy also suffered significant supply shocks — thanks to the impact of the floods, disruption in energy supplies and the spillover effect of the European debt crisis on debt and fiscal sustainability. The fight against extremism compounded the situation. “The signifi cant collateral impact has been borne by Pakistan in terms of the squeezing of fiscal space for critical development and social sector expenditures that hampered prospects in future.” Because of all this, real GDP growth was 2.4 per cent against the target of 4.5 per cent; a dismal figure even compared to the previous year when the growth rate was 3.8 per cent.

In fact, all the major sectors — agriculture, manufacturing and services — failed to meet the estimated targets. However, the main setback was clearly the agriculture sector that was badly hit by the floods and led to lower than estimated crops of rice and cotton.

Despite all this, the sector, which grew 1.2 per cent instead of 3.8 per cent, provided some support to exports and the manufacturing sector.

The growth in other sectors was no better. The industrial sector, hampered by electricity and gas shortages, saw an expected decline in production by 0.1 per cent against the targeted growth of 4.9 per cent. Large-scale manufacturing, too, is projected to grow a mere one per cent against the target of 4.9 per cent.

The services sector managed to achieve a growth rate of 4.1 per cent but remained short of its 4.7 per cent target.

Dr Hafeez Shaikh specifically mentioned the lacklustre investment situation, saying it also suf fered from a negative perception abroad.

He said investment declined to 13.4 per cent of GDP during the current year against 15.4 per cent of last year. In absolute numbers, however, the investment was estimated at Rs2.52 trillion against Rs2.28 trillion last year, showing an improvement of Rs300 billion.

The national savings rate also decreased to 13.8 per cent of GDP during the current year against 15.4 per cent last year and a target of 14.5 per cent.

The State Bank of Pakistan maintained a tight monetary policy throughout the year. The efficacy of monetary policy to shave off aggregate demand from the economy was affected due to unanticipated fiscal pressures emanating from a revenue-expenditure mismatch.

Government borrowing for budgetary support recorded an increase of Rs614 billion as compared to Rs397.6 billion in the previous year. The SBP financing showed a net increase of Rs146 billion and financing from scheduled banks witnessed an increase of Rs467.4 billion.

The government will restrict banks’ investment in government securities only to the extent required for meeting statutory requirements.

Delayed taxation measures led to the revision of the FBR target from Rs1,667 billion to Rs1,588 billion.

The external sector remained in a comfortable zone as 10-month exports surged to $20.2 billion against $15.8 billion during the same period last year, showing an increase of 28 per cent. Remittances increased to $9.1 billion against $7.3 per cent last year.

The external debt and liabilities stood at $59.5 billion by end-March, up from $55.9 billion in June last year and the major increase was mainly because of a weaker dollar against major currencies such as euro and yen. The net impact of cross-currency valuation cost was estimated at $2.7 billion.

Total public debt increased by Rs1.162 trillion in the first nine months of the current year, reaching a total outstanding amount of Rs10.02 trillion — an increase of 13 per cent.