GDP growth in 2022-23

The World Bank has revised its projection downwards of the GDP growth rate of the economy of Pakistan in 2022-23 from 4% to 2%. Presumably, this reflects the negative impact on domestic output of the floods, especially on agriculture.

Earlier in the IMF Staff report of the 1st of September 2022, the GDP growth rate was projected at 3.5% in 2022-23. The decline from 6% growth in 2021-22 was anticipated on the grounds that efforts at stabilization of the economy will require strong contractionary fiscal and monetary policies which will restrict growth.

The Planning Commission, in its usual optimism, has projected a GDP growth rate of 5% in 2022-23. The title of the Annual Plan for the year is ‘from stabilization to sustainable growth’. The Plan fails to recognize that the current account and budget deficit rose to extremely high levels of 4.6% of the GDP and 7.9% of the GDP, respectively, in 2021-22. Therefore, the primary emphasis must be on stabilization initially and sustainable growth will come later.

The growth projections by the IMF and the Planning Commission were made prior to the devastating floods. The recent projection by the World Bank builds in the impact of the floods. Apparently, it has brought the GDP growth rate down by 2 percentage points, equivalent to a loss of $7 billion in national output due to the floods.

This is clearly a big understatement. Government estimates are in the range of $15–16 billion. A similar amount is due to the devastation of infrastructure, housing, and livestock. The total loss due to the floods is in the range of $30 to $32 billion.

An exercise has been taken with the help of the BNU Macroeconomic Model to project the GDP growth rate in 2022-23, which builds in fully the impact of the floods.

In addition, there is need to account for the constraints to output, especially in the industrial sector, due to the recent severe restrictions imposed on imports, including that of raw materials and intermediate goods. Already, in the first five months the volume of imports is estimated to have fallen by as much as 30%.

The agricultural sector has been badly hit by the floods, especially the crop sectors. Cotton arrivals are down by almost 40%. According to the latest estimates released by the US Department of Agriculture, based on satellite imagery, output of rice is likely to have fallen by almost 30% and other Kharif crops by over 10%.

There is likely to be a delay in the sowing of wheat until the flood water clears. Consequently, there will be some decline in crop yields and acreage in the Rabi season. In particular, the wheat crop may be lower by up to 5%.

The output of minor crops has also been hit. A clear indicator of the negative impact is the phenomenal jump in prices of vegetables and fruits. For example, the price of onion has gone up by an unbelievable 444%. Overall, the estimated impact on the minor crop sector is a decline in output of 10%. Similarly, given the estimated loss of livestock, the growth rate of the sector is likely to fall to 1.5%. Overall, the agricultural sector is likely to exhibit a negative growth rate in 2022-23 of 3.5%. This is equivalent to a loss of almost $3 billion.

The manufacturing sector will face constraints to growth due particularly to shortages of imported raw materials and intermediate goods. This includes key industries like textiles, pharmaceuticals, chemicals, vegetable ghee, iron and steel, transport equipment, etc.

Already, the Quantum Index of Manufacturing (QIM) has shown a decline of 3% in the first four months of 2022-23 and a big fall of 7% in October. Other consumer goods industries are also likely to be impacted negatively by a fall in demand, especially of the large flood affected rural population.

Overall, the manufacturing sector is likely to show a decline of over 3.5%. Similarly, construction activity could fall sharply, as is visible already with a decline of output in the cement industry of 18% and only 1% growth in the iron and steel industry. The electricity and gas sector is characterised by more load-shedding than in previous years. Overall, the industrial sector is projected to show a negative growth rate of 4% in 2022-23.

Turning to the services sector, this sector is also likely to be impacted by the contraction in the commodity producing sectors of close to 4%. Further, the level of activity in the wholesale and retail trade sectors will also see a decline due to the large fall in imports.

The transport and communications sector is also showing negative growth with decline in fuel use for transport of over 20%. The public administration sector will, however, show more rapid growth due to the relief and rehabilitation operations in the flood affected areas.

Private services are likely to continue growing but at a somewhat slower rate. Overall, the services sector of the economy is likely to show a growth rate of close to 1%.

The projected sectoral and overall GDP growth rates are presented below:

===========================
               Growth Rate 
                    (%)
                 in 2022-23
===========================
Agriculture            -3.5
Industry               -4.0
Services                1.0
GDP                    -1.0
===========================

Therefore, like 2019-20 after Covid-19, there is the likelihood of a fall in the GDP of 1%. However, unlike 2019-20, when the negative impact was larger on services, this time the commodity producing sectors have been hit more.

The pre-floods projection of GDP growth in 2022-23 of 3.5% by the IMF was of the right order of magnitude. Therefore, the impact of the floods and measures to restrict imports via the holding back of import LCs are likely to result in a 4.5% loss in the GDP in 2022-23. This is equivalent to a loss of over $15 billion, which is close to the official estimates.

The next week’s article will project the GDP growth rate in 2022-23 from the expenditure side.

Copyright Business Recorder, 2023