The Annual Plan Coordination Com-mittee has set the target for GDP growth of 4.8 percent for 2021-22 and the rate of inflation at 8.2 percent. This implies a significant increase from the growth rate of almost 4 percent in the economy in 2020-21 and some reduction in the rate of inflation of 9 percent on average monthly this year.
The basic question relates to the feasibility of achieving a GDP growth rate of close to 5 percent after a gap of four years. In the intervening period, from 2018-19 to 2020-21, the average growth rate has been only 1.8 percent. The highest growth achieved is close to 4 percent in 2020-21, partly because of the low base effect of the fall in the GDP in 2019-20 after COVID-19.
What are the conditions in the global economy which will facilitate faster growth in Pakistan, due to more rapid growth in exports, foreign direct investment, and inflow of foreign assistance? Also, what is the mix of domestic fiscal, monetary, trade, investment and energy pricing policies that is necessary for promoting the growth process in the economy?
The objective of this article is to use the BNU Macro econometric Model for forecasting the economic outcome in different scenarios. This model has 46 equations and 22 exogenous or policy variables which drive the model. A consistency is built in between growth in different expenditure components of the GDP and sectoral growth.
The external environment is assumed in the model as positive in nature. The world economy is back on a relatively high growth path after the decline in 2020. The recovery is expected to be fully completed by mid-2021, followed by growth of over 5 percent. The volume of world trade is also expected to rise rapidly by almost 10 percent.
However, international commodity prices have also been increasing at a fast rate. The price of oil has almost doubled over the last six months and is now hovering at over $70 per barrel. Similarly, the price of soyabean oil, sugar, wheat, and cotton have surged by between 10 percent to 20 percent. Remittances are projected to show little growth in 2021-22.
Turning to the required domestic policy framework, the simulations of the model reveal that the stance of policies should be as follows:
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Table 1
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Projected Sectoral Growth in the GDP in 2021-22
(Rs in billion at constant prices)
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Value Added Growth Rate
2020-21 2021-22 (%)
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Agriculture 2505 2555 2.0
Industry 2493 2660 6.7
Services 8041 8451 5.1
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GDP at factor cost 13036 13666 4.8
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(i) The SBP policy rate is adjusted downwards in real terms by one percentage point and the TERF facility continues.
(ii) The rupee has appreciated significantly in real terms by over 7 percent since December 2020. The assumption is that this process will be reversed in 2021-22.
(iii) The rate of expansion in the money supply will remain in the range of 13 percent to 15 percent, with two contrary developments. First, a stronger rise in demand for investment by the private sector and second, a fall in the size of the budget deficit leading to less growth in government domestic borrowing.
(iv) Faster increase in Government current expenditure due to a significant hike in salaries and pensions.
(v) A big jump in the size of the Federal PSDP in nominal terms by over 20 percent.
(vi) A rise in indirect tax revenues of almost 20 percent and only a nominal increase in the outlay for subsidies.
(vii) No real increase in electricity and gas tariffs.
(viii) Restoration of fiscal incentives for investment.
It will be feasible to follow more pro-growth policies in 2021-22, with the balance of payments and the foreign exchange reserves in a moderately favorable position.
The simulation results of the model for achieving 4.8 percent GDP growth with regards to sectoral growth in 2021-22 are as follows:
The growth rate of agriculture in 2021-22 will be limited by a ‘high base’ effect with record production of wheat, rice, and maize in 2020-21 and persistent problems with the cotton crop.
However, the industrial sector is likely to remain buoyant due to improvement in export volumes in line with the renewed buoyancy in world trade and fast increase in demand for construction inputs because of the anticipated big increase in development spending. The services sector is projected to have an intermediate growth rate, close to 5 percent.
The projected GDP by expenditure in 2021-22 is given in Table 2. Public Investment is expected to show the fastest growth. Consumption expenditure and private investment are likely to show growth rates between 5 percent to 6 percent. Imports will continue growing, especially due to higher demand with faster GDP growth. Export volumes are projected to increase by close to 5 percent.
Therefore, given the positive developments on the global front following the widespread use of vaccination in advanced countries and the appropriate mix of domestic policies, a GDP growth rate of 4.8 percent is feasible in 2021-22.
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Table 2
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Projected GDP by Expenditure in 2021-22
(Rs in billion at constant prices)
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2020-21 2021-22 Growth Rate (%)
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Household final
consumption expenditure 11243 11811 5.0
General government final
consumption expenditure 1693 1781 5.2
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Gross Fixed Capital Formation 1910 2053 7.5
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Private Investment 1418 1497 5.6
Public Investment 492 556 13.0
Changes in inventories 220 231 4.8
Exports of goods and services 1575 1647 4.6
Less Imports of goods and services -2864 -3026 5.7
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GDP by Expenditure 13776 14497 5.2
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Indirect Taxes less subsidies -740 -836 -13.0
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GDP at factor cost 13036 13661 4.8
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However, there will continue to be upward pressures on the rate of inflation in 2021-22. Greater impact of imported inflation is likely, especially due to rise in prices of food and petroleum imports by Pakistan. As such, the Model’s projection is that the average rate of inflation will be 9.6 percent in 2021-22, somewhat higher than the rate in 2020-21.
There is also a need to present an alternate downside scenario of growth in 2021-22 in the presence of a different mix of policies including the following:
(i) No reduction, and possibly enhancement, in the policy rate of the SBP.
(ii) Aggressive implementation of hike in electricity tariff as per the original agreement with the IMF.
(iii) Enhancement in the petroleum levy back to Rs 30 per liter from Rs 10 to 12 currently, again as per the original understanding with the IMF.
(iv) Substantial withdrawal of sales tax exemptions and rise in the tax rate in number of items, also part of the IMF programme.
The model simulation with these policy changes reveals that the GDP growth rate projected in 2021-22 is close to the range of 3.6 to 3.8 percent, while the likely inflation rate jumps to between 11.5 percent to 12 percent next year.
The projected position of the current account in the balance of payments in 2021-22 is presented in Table 3. In the wake of rising international prices and relatively fast GDP growth of 4.8 percent, imports of goods and services are likely to rise rapidly in dollar terms in 2021-22 by almost 12%, as compared to growth in exports of 9%.
Home remittances are projected to show a negligible increase in view of the high level in 2020-21. Consequently, the current account deficit could rise sharply next year and exceed $6 billion. This could begin to put some pressure on the foreign exchange reserves of the country.
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Table 3
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Projected Balance in the Current Account, 2021-22 ($ million)
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2020-21 2021-22
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Current Account Balance -1,509 -6,108
Balance of Trade in Goods and Services -29,284 -33,548
Exports 31,066 33,862
Imports -60,350 -67,410
Primary Income (Net) -5,385 -6,051
Secondary Income 33,160 33,491
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The bottom line is that there is space now to pursue a set of pro-growth policies. A more moderate approach to budget deficit reduction of 1 percent of the GDP can also be adopted. However, in turn the Government must avoid getting into the election cycle of very expansionary fiscal policy.
(The writer is Professor Emeritus at BNU and former Federal Minister)
Copyright Business Recorder, 2021
The writer is Professor Emeritus at BNU and former Federal Minister
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