FY2021-22: Overstatement of GDP growth rate

The latest Pakistan Economic Survey for 2021-22 reveals that the economy has performed well this year and the growth rate achieved is 5.97 percent.

This comes on the back of a growth rate in the GDP of 5.74 percent in 2020-21, which was the year of recovery from Covid-19. Seldom in the history of Pakistan has the growth rate been close to 6 percent in two successive years.

The high growth rate also runs counter to projections for 2021-22 by international agencies. Both the IMF (International Monetary Fund) and the World Bank had anticipated a growth rate of between 4 and 4.5 percent. This was based on the expectation that fiscal policy, in particular, would be less expansionary in 2021-22, with a constraint on development spending.

Before on assessment is made of the sectoral growth rates from the supply-side, a litmus test is applied to test the veracity of GDP estimates. Household consumption expenditure is derived as a residual of the supply-side GDP estimate minus other expenditure components on the demand-side including government consumption expenditure, total public and private investment, change in stocks, exports of goods and services minus imports of goods and services.

The resulting estimate of household consumption expenditure for 2021-22 is extraordinarily high. It is estimated at Rs 36,948 billion at constant prices of 2015-16. The rate of growth in this expenditure is as high as 10 percent. The marginal propensity to consume from additional income emerges as an unbelievable 164 percent, one of the highest ever.

The real household consumption expenditure growth of 10 percent is well beyond the realm of possibilities. If this is the case than the people must be enjoying a veritable consumption boom even in the presence of high double-digit inflation. The ground reality is that real consumption levels of households have fallen sharply.

The inevitable conclusion is that the level of household consumption expenditure has been substantially overstated. Consequently, the level of the GDP and the growth rate have been significantly overstated.

The other expenditure components of aggregate demand show realistic growth rates. Therefore, the overstatement of GDP is from the supply-side in value-added by different sectors of the economy. This is examined below.

The agricultural sector is shown as likely to achieve a high growth rate of 4.4 percent. This is even after some bumper crops in 2020-21. Presumably, this is due to the big jump in cotton output of over 17.8 percent, although the volume of raw cotton imports has declined by only 0.4 million bales up to May 2022. Also, the growth rate in the cotton ginning sector is shown as much less at 9 percent.

The output of wheat is lower in 2021-22 by almost 4 percent, as reported in the Survey. It could have fallen more and 3 million more tons of wheat will need to be imported according to government sources. Wheat is the dominant major crop with a weight of over 40 percent.

This neutralizes almost 73 percent of the exceptional growth in cotton output. Therefore, the likelihood is that the growth rate of the major crop sector in 2021-22 will be close to that achieved in 2020-21 of 3 percent.

The other sector where the growth rate may be overstated is large-scale manufacturing at 10.5 percent. According to the PBS (Pakistan Bureau of Statistics), up to April 2022 the growth rate with the base year of 2005-06 is much lower at 3.4 percent and rises to 10.7 percent with the new base year of 2015-16.

The question is how there can be such a large difference in the growth rate with a change in the base year? This needs to be answered by PBS. Further, there has been gas load-shedding earlier this year and now persistent high power load-shedding. Surely, industrial output would have been constrained by these outages.

The construction sector apparently continued to grow in 2021-22, by over 3 percent. However, cement output has fallen by 4.6 percent in the first ten months, partly due to a fall in exports, and imports of steel have declined somewhat. As such, it is unlikely that we will eventually see a positive growth rate in the construction sector in 2021-22.

There are serious problems with the reported growth rate of the electricity and gas sector of 7.9 percent, despite heavy load-shedding. Also, the circular debt has gone up sizably in both the electricity and gas sectors.

This will exert a big negative influence on the level of value-added. This was recognized initially in the GDP estimates for 2020-21 when the electricity and gas sector was shown as experiencing a big negative growth rate of 22 percent, which has since been raised to a positive 6.3 percent, for reasons which are not clear.

Finally, we have a serious problem with the reported high growth rate of 10 percent in the wholesale and retail trade sector. This is happening after already an over 10 percent growth rate in 2020-21, which was expected after the return to normalcy in domestic trading activity with the subsiding of the spread of Covid-19. But a second successive year with growth over 10 percent is highly unlikely. This sector, especially the retail end, has also been impacted by power load-shedding.

The GDP growth rate estimate of 5.97 percent is preliminary in character. It mostly reflects developments in the first nine months of the year. The

last quarter is witnessing some negative outcomes like a low wheat crop, high incidence of power load-shedding, cutback in federal development spending, big increase in circular debt in the energy sector with the recent increase in fuel costs, large jump in interest rates and cutback in real consumer spending due to higher inflation.

Overall, the revised estimate available in next year’s Pakistan Economic Survey will probably see a reversion close to the original growth rate projection of 4 to 4.5 percent in 2021-22.

Copyright Business Recorder, 2022