KARACHI: FY11 proved to be another difficult year for Pakistan's economy and against the target of 4.5 percent, the country could post a growth of 2.4 percent growth. This was even weaker than the 3.9 percent achieved in FY10, according to the State Bank's Third Quarterly Report on the State of Pakistan's Economy for FY11 released on Monday.
The report said a slowdown in growth was anticipated since the country had suffered severe losses due to the devastation caused by the unprecedented floods in August 2010. In addition to major Kharif crops, the allied industries, trading services and export sectors were adversely affected with floods. Furthermore, logistics, power infrastructure, and many industrial units were also damaged, the report added.
However, the agriculture sector posted a strong recovery after the devastating impact of the floods and this recovery was mainly led by the livestock sub-sector, followed by minor crops and some major crops particularly sugarcane and wheat. Pointing out the reasons of slow economic growth the report said that growth was also hampered as the government had to re-allocate development funds to disaster management and rehabilitation due to the flood. "A reduction in several key expenditure heads was therefore required and many public construction projects were shelved. Although this strategy helped the government cope with an unexpected shock, it has had adverse consequences for investment and productive capacity in the country", the report said.
Another key factor constraining growth was the energy shortfall. Specifically, while gas supply constraints are directly reducing production in a number of industries, the curtailment of gas and rising furnace oil prices, have compelled power producers to run below capacity. The resulting power shortage has added to the energy deficit in the country, the report said.
Finally, the policy response to growing macroeconomic imbalances particularly the fiscal deficit and persistent inflation has also had a bearing on the real sector performance, the report added. On the positive side, the only growth stimulus came from the external front. The recovery in developed economies helped boost Pakistan's exports (textile and leather) and led to a record inflow of remittances, the report said and added that anecdotal evidence suggests that higher remittances strengthened private consumption, and also supported real estate investment and residential construction.
More worryingly, investment declined in FY11 for a third consecutive year. The most pressing concern is low investment in energy; more specifically, petroleum exploration and coal mining, infrastructure for LPG and natural gas import, and the construction of dams. Without a supportive energy infrastructure, future growth opportunities in the short-to-medium term are likely to face bottlenecks, the report said.
"Notwithstanding the significant losses caused by the floods, growth in the livestock sub-sector was sufficient to provide much needed impetus to agriculture growth. While, in the case of minor crops, some recovery was expected after the flood as farmers focused more on minor crops including vegetable, pulses etc," the report said. The floods and the favourable weather conditions also helped enhance sugarcane production both in Punjab and Sindh. Not surprisingly, therefore, production estimates were revised upward to 53.7 million tons, from the earlier estimates of 49.4 million released in November 2010.
The record wheat crop of 24.2 million tons produced in FY11 was slightly lower than the target of 25 million tons. A surge in wheat output is attributed to: (a) improved water availability; (b) supportive weather conditions; (c) increased area under cultivation along with better yields in barani areas in Punjab and Sindh; and (d) provision of free-of-cost seeds in flood affected areas, the report pointed out.
Looking forward, the SBP report said that agriculture growth may improve in FY12 because of expected recovery in rice and cotton and improved water availability. Rising urea prices and timely availability are, however, major concerns. Reviewing the performance of Large Scale Manufacturing, the report revealed that overall LSM posted a growth of only 1.6 percent during Jul-Mar 2011, substantially lower than 4.4 percent in the corresponding period of FY10. However, quarterly data reveals some signs of recovery as LSM growth improved to 2.4 percent on a YoY basis in third quarter of FY11, after rising by 1.2 percent during first half of FY11.
This gradual recovery can be traced to a number of factors. First, despite facing losses in August 2010 due to the floods, industries based on agri raw material thrived during the quarter due to better crops. Second, favourable movements in global commodity prices helped improve margins of domestic producers. Lastly, export demand remained strong, the report pointed out.
Going forward, the report shows concern over the energy crisis and said that energy shortages will continue to be a binding constraint for manufacturing growth, particularly for textile, glass making and fertiliser units. While emphasising alternative sources of energy, there is a need to rationalise tariffs for different users of natural gas and improve the gas pricing to incentivise further exploration and extraction, the report said.
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Selected Economic Indicators
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FY09 FY10 FY11
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Growth rate (percent)
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GDP (at factor cost) Jul-Jun 1.7 3.8 2.4
Agriculture Jul-Jun 4.0 0.6 1.2
Major crops Jul-Jun 7.8 -2.4 -4.0
Minor crops Jul-Jun -1.2 -7.8 4.8
Livestock Jul-Jun 3.1 4.3 3.7
Industry Jul-Jun -0.1 8.3 -0.1
LSM Jul-Jun -8.1 4.9 1.0
Services Jul-Jun 1.7 2.9 4.1
Exports (fob) Jul-Apr -3.4 7.3 28.1
Imports (cif) Jul-Apr -9.8 -2.8 14.7
Tax revenue (FBR) Jul-Apr 19.9 11.6 12.2
CPI (12 month ma) May 21.5 11.8 13.9
Private sector credit Jul-4th June -0.1 2.8 3.3
Money supply (M2) Jul-4th June 6.5 9.8 13.7
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billion US dollars
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Total liquid reserves1 31st May 11.6 16.0 17.2
Home remittances Jul-Apr 6.3 7.3 9.0
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Net foreign
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investment Jul-Apr 2.2 1.6 1.4
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percent of GDP2
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Fiscal deficit Jul-Mar 3.2 4.3 4.5
Trade deficit Jul-Apr 8.7 6.9 5.8
Current a/c deficit Jul-Apr -5.5 -1.9 0.3
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1. With SBP & commercial banks.
2. Based on full-year GDP in the denominator.
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