Outlook for 2019-20

The year, 2018-19, is about to close with a marked slowdown in the economy. First estimates are that the GDP growth rate has plummeted to 3.3 percent as compared to 5.5 percent last year. Simultaneously, the average monthly rate of inflation has approached 7.5 percent as compared to below 4 percent in 2017-18. Therefore, the economy has found itself in the grips of 'stagflation', with all its implications on rising unemployment and poverty.
Will we see some recovery in 2019-20 or will there be persistence of the process of stagflation and continued negative impact on the lives of the people? The Government's view on the prospects can be judged from the Annual Plan for 2019-20 which was presented by the Planning Commission recently to the National Economic council (NEC), chaired by the Prime Minister and with the highest level of representation from the Provinces.
The Plan projects a modest recovery next year with the GDP growth rate approaching 4 percent. This is predicated on a strong upsurge in the growth rate of agriculture, due in particular to favourable weather conditions, unlike the untimely rainfall in the Rabi season this year, which affected the wheat crop and the big failure of cotton and sugarcane earlier. As such, the growth rate of the sector is expected to rise to 3.5 percent as compared to the likely outcome of below 1 percent this year.
Similarly, the manufacturing sector is also expected to perform better in 2019-20. This year, after a gap of ten years, the overall level of output in the large-scale manufacturing sector is actually likely to exhibit negative growth. The projected growth rate for next year is still low but positive at 2.4 percent. Presumably, this is based on a better performance of manufactured exports and stronger import substitution on the back of a large depreciation in the value of the rupee. Consequently, with an overall better performance of the commodity-producing sector the expectation is that the services part of the economy should be able to register a growth rate approaching 4.5 percent.
The cautious optimism of the Planning Commission about the economic prospects for 2019-20 needs to be carefully examined. First, at the global level, the growth rates of the world economy and trade are beginning to flounder. World trade had shown a relatively high growth rate of 5.4 percent in 2017-18. It has since fallen to below 3.4 percent with no real prospect for improvement in the foreseeable future. Clearly, Pakistani exports are likely to be confronted with a tougher market environment. Also, the oil price is likely to stay relatively high due to the US sanctions on Iran and a tense situation in the Middle East.
Perhaps the single most important factor which will influence the prospects for the economy is the onset of the IMF Programme in early 2019-20. Historically, efforts at the stabilization of the economy under the aegis of such a Programme have restricted the pace of economic growth. For example, the IMF Stand-By Arrangement to Pakistan in 2008 was followed by a severe plummeting of the GDP growth rate from 5 percent in 2007-08 to as low as 0.4 percent in 2008-09. Agriculture did perform relatively well with a growth rate of 3.5 percent. However, the growth rate of the large-scale plummeted severely from a positive over 6 percent in 2007-08 to a negative 6 percent in 2008-09. Consequently, the growth rate of the services sector was only 1.7 percent.
A similar outcome is observed in 2013-14, the first year of the Extended Fund Facility of the IMF with Pakistan. The GDP growth rate was reported by the PBS at 4 percent. However, there is ample evidence that this growth rate was overstated and actually closer to 3 percent, especially in the presence of a stagnant level of investment and a fall in exports of goods and services. The overstatement is confirmed by the highly unlikely 6 percent growth in private consumption expenditure during the year.
There is a fairly clear explanation as to why the first year of a Fund programme is accompanied by a low GDP growth rate. There is always a 'frontloading' of reforms for stabilizing the economy. This includes a big increase in the tax incidence and big cutback in public expenditure in an effort to restrain aggregate demand and thereby directly reduce the fiscal deficit and indirectly contain the current account deficit.
Simultaneously, there is a hike in interest rates and a major depreciation in the exchange rate along with a big jump in electricity tariffs. All these measures are expected to be undertaken, perhaps with even greater intensity this time, in the next few weeks. For example, the primary deficit is targeted to fall by almost 1.8 percent of the GDP to 0.6 percent of the GDP in 2019-20. Simultaneously, the expectation is that there will be an over 40 percent reduction in the size of the current account deficit next year.
Therefore, it is much more likely that the GDP growth rate in 2019-20 will not exceed 3 percent. Private consumption spending will be restricted by the lack of growth in disposable incomes due to higher direct taxation and rise in consumer prices because of the continuing process of rupee devaluation and higher indirect taxes. Private investment will remain shy in the face of high interest rates and rise in the prices of imported machinery. Public expenditure will also remain constrained by the lack of fiscal space due to the pressure for a big deficit reduction. In fact, if agriculture does not perform better, even when faced with distinctly higher fertiliser and other input prices, then the overall GDP growth rate could even fall below 3 percent in 2019-20.
Turning to the likely rate of inflation in 2019-20, the Annual Plan has apparently retained a degree of optimism that it will continue to be single-digit. However, here again the outcome may be different with the year witnessing double-digit inflation for a number of reasons. First, inflationary expectations have become more embedded in the economy after the near doubling of the rate this year. Second, if the current account deficit is to be substantially reduced also in 2019-20 then we may witness a high double-digit depreciation in the value of the rupee next year. Further, in an effort to raise almost Rs 700 billion as additional revenues from taxation proposals, exemptions will be withdrawn and tax rates are likely to be enhanced on a number of consumer goods along with an increase in electricity and gas tariffs.
Therefore, the process of 'stagflation' is likely to continue in 2019-20. There are a number of other factors which could contribute to even greater worsening of the economic situation. There may be greater polarization between the opposition parties and the Government and a measure of public protect against rising prices and unemployment. The impending summer months may witness more power load shedding due to the peak demand and supply constraints arising from the large and growing circular debt. Also, more acts of terrorism are occurring once again.
The consequence is that the country may witness for the second year running a big increase in the number of unemployed and the number of people falling below the poverty line. Estimates are that almost one million more workers may not be able to find jobs and over four million people could lose the fight against poverty in 2019-20.
There is need for sagacity and wisdom on the part of the political leadership both of the ruling and the opposition parties. This is essential if the process of economic stabilization is to proceed in an uninterrupted manner. The likelihood of a default must be avoided at all costs. There is the risk of the 'perfect storm' which could take the country back many years.
(The writer is Professor Emeritus and former Federal Minister)