FY23: Uncovering drivers of economic performance

The National Account numbers for FY2023 have been published and, unfortunately, they paint a truly dismal picture of economic performance. Under the PDM (Pakistan Democratic Movement) government, economic activity has collapsed to basically zero growth in FY23 (0.3 percent to be exact), compared to two years of nearly 6 percent growth under the PTI (Pakistan Tehreek-e-Insaf) government.

There are valid concerns whether or not 0.3 percent growth is correctly estimated. The country is truly in the midst of stagflation with record-high inflation and practically no growth has created an unprecedented socio-economic crisis with record job losses and millions of households pushed below the poverty line.

The National Accounts Committee once again reaffirmed the strong economic performance under the PTI government. The economic growth numbers for the last two years of the PTI government have been adjusted higher with the final growth for FY2021 estimated at 5.8 percent (from 5.7 percent earlier) and for FY2022 GDP growth has been revised to 6.1 percent (from 5.97 percent earlier).

This robust economic performance was on the back of a V-shaped post-COVID recovery from -1 percent growth in FY20. PTI’s is the only government since FY2008 which achieved 2 consecutive years of average 6 percent economic growth.

This year, an anomalous situation has been noted in the public release of Nation Income Accounts. Since FY02 onwards, the growth in GDP deflator lies between growth in CPI and WPI; except in two years namely, FY21 and FY23. In FY21, growth in GDP deflator was slightly higher than the growth in WPI. In FY23, growth in GDP deflator, instead of being higher, was significantly lower than the growth in CPI.

In relative terms, a higher value of GDP deflator implies that real GDP growth would be understated while a lower growth in GDP deflator will translate into over-estimation of real GDP growth. Therefore, prima facie, it can be inferred that real GDP growth in FY21 is slightly understated while real GDP growth in FY23 is grossly overstated.

Growth under the PTI government was broad-based with all sectors of the economy posting record output. Agriculture sector growth of 4.3 percent in FY2022 is the highest since FY2005. Major crops registered growth of 8.2 percent which is also the highest since FY2005. This was driven by the National Agriculture Emergency Program with a focus on upgrading irrigation systems and helping farmers to receive timely payments.

The large-scale manufacturing (LSM) sector posted growth of 11.9 percent in FY2022, which is even higher than the 11.5 percent growth in FY2021. This is the first time since FY2005 that the LSM sector posted two consecutive years of more than 11 percent growth. This was driven by record $ 32.5 billion exports and 22 percent growth in credit to the private sector in FY2022.

As a result of the consecutive high growth in FY21 and FY22, record job creation was witnessed under the PTI government. According to the PBS Labor Force Survey 2021, a total of 5.5 million new jobs were created in the first three years of the PTI government. On average 1.84 million jobs were created each year, which is nearly double the average 1.1 million jobs created under the PML-N (Pakistan Muslim League-Nawaz) government (2013-2018). If the PTI government had completed its five-year term, it is likely that the target to create 10 million new jobs for the youth would have been achieved.

Given the robust economic performance, it strains credulity to understand the reasons for the 5-year term of PTI government being short-circuited, especially when it was on the cusp of launching a major medium-term program for economic transformation and sustainable growth during the February-April 2022 period.

Data indicates that GDP growth in FY22 would have been even higher than 6.1 percent as there are other indicators which suggest otherwise. Take, for instance, the livestock sector growth number for FY22, which is revised lower to 2.25 percent (from earlier provisional estimates of 3.25 percent). Whereas, it is now estimated to have grown by 3.8 percent in FY23, the highest growth in the last seven years.

FY23 was the year of the devastating floods where, according to the government’s own damage assessment report estimates, more than a million livestock were killed in the floods. FY23 was also the year when poultry feedstock was initially banned and then remained in short supply due to import restrictions. How does one explain this sudden increase in livestock growth under the PDM government?

It gets even more interesting that the Electricity, Gas, and Water supply sector growth numbers under the PTI government in FY2022 have been slashed to just 3.1 percent (from 7.9 percent earlier). This is despite the fact that according to Nepra (National Electric Power Regulatory Authority) power generation increased by 7.2 percent in FY22. Whereas in the current fiscal year, power generation has declined 10 percent during Jul-Apr FY23 but growth, according to the PDM government, has doubled to 6 percent.

With lower power production and lower gas production in the current year, it is truly a miracle that somehow the energy sector growth has doubled under the PDM government. Another factor in this regard is the subsidy given to the power sector which are part of the value added and, according to Budget in Brief 2022-23 (page 42), the subsidy given to the power sector was Rs 989 in FY22 as against Rs 511 billion in FY21, which shows a growth of 93 percent and contraction of 50.5 percent in FY23.

This factor alone could push the growth of FY22 by 40 basis points and contraction by 20 basis points in FY23. Furthermore, despite a sharp contraction of 8.4 percent in LSM sector, small-scale manufacturing which primarily produces intermediary goods for the larger industries, miraculously grew by 9 percent.

====================================================================================================
                    Composition and Point Contribution to Aggregate Demand
====================================================================================================
Flows                         2016-17    2017-18   2018-19   2019-20   2020-21   2021-22     2022-23
----------------------------------------------------------------------------------------------------
Private Consumption             5.6        6.0       4.6      -2.4       8.0       5.8           1.4
Public Consumption              0.5        0.6      -0.2       0.9       0.2      -0.1          -0.7
Total Consumption [C]           6.1        6.5       4.5      -1.6       8.2       5.7           0.7
Gross Fixed Investment          1.1        1.5      -1.7      -0.9       0.5       0.7          -2.2
Change in Stocks                0.1        0.1       0.0       0.0       0.1       0.1           0.0
Total Investment [I]            1.2        1.6      -1.6      -0.9       0.6       0.8          -2.2
Exports (Goods & Serv) [X]      0.2        0.9       1.2       0.1       0.7       0.6          -0.9
Imports (Goods & Serv) [M]      3.0        2.9       1.5      -1.1       2.9       2.4          -4.1
Net Exports [X-M]              -2.8       -2.0      -0.3       1.2      -2.2      -1.8           3.2
Aggregate Demand (C+I+X)        7.5        9.0       4.0      -2.3       9.4       7.1          -2.4
Domestic Demand (C+I)           7.2        8.2       2.8      -2.5       8.8       6.5          -1.5
GDP MP                          4.4        6.2       2.5      -1.3       6.5       4.7           1.7
====================================================================================================
                                                                                         Source: PBS
====================================================================================================

However, this miracle growth does not stop there. According to the National Accounts, the transport and storage sector growth accelerated to 4.7 percent under the PDM government in FY23, compared to 4.1 percent in FY2022.

This growth is even more remarkable considering that the consumption of primary fuel for transportation declined; diesel sales fell 28 percent and petrol sales fell 17 percent during the first 10 months of FY2023. The growth in the transport and storage activity has come despite the restrictions on imports, lower crop production, and a sharp slowdown in manufacturing activity.

The miraculous growth in different components of Services sector in FY23 is even extended to social sectors. The education sector growth was registered at 10.4 percent, which is the highest ever growth in the sector in any single year, with the previous highest recorded at 11 percent in FY16. The health services growth was recorded at 8.5 percent, which is even higher than the 6.2 percent posted in FY20 during the Covid-19 pandemic when record-high resources were diverted towards the sector.

It is important that for the sake of preserving credibility of the PBS, a press release is issued which provides an explanation and rationale for the miraculous or should we say anomalous growth numbers pointed above.

Pivoting to an analysis of growth point contribution to aggregate demand, it is abundantly clear that in FY23, both public and private ‘consumption’ along with ‘investment’ underwent a massive contraction. Net exports, on the back of administratively-managed major import compression, provided a 3.2 percentage points contribution to growth in aggregate demand in FY23. In terms of assessing recovery prospects for FY24, a comparison with drivers of V-shaped economic growth in FY21 would be quite instructive.

In FY21, eight percentage points contribution of ‘consumption’ in aggregate demand followed by a surge in exports from 0.1 percentage point in FY20 to 0.7 percentage point in FY21 led to a rapid economic recovery. Overall, except for Covid period of FY20, the slump in point contribution by -2.4 percentage points in aggregate demand in FY23 appears to be an extraordinary event in recent economic history of the country. Private consumption registered highest nominal growth of the decade at 25 percent in FY23 which appears to be at odds with excessive demand compression measures that were undertaken during the year.

Dr Hafiz Pasha recently estimated that the economy posted a contraction of 3 percent under the PDM government with 8 million workers becoming unemployed in FY23 and the unemployment rate rising to 10 percent. The economic contraction caused by the PDM regime will lead to nearly 18 million households falling below the poverty line, with Dr Pasha stating that ‘the absolute increase in the number of poor has probably never been seen before’. No amount of media management can hide these stark ground realities facing the economy today.

In real terms, about Rs 2.2 trillion was added to the GDP in FY22 while Rs 112 billion was added in FY23. The path of economic contraction which has led to practically zero growth in FY23, from 6.1 percent in the previous year, has been plotted through regressive tax measures, inexplicable import restrictions, and the crowding out of the private sector in the credit markets.

Not properly managing implementation of the IMF (International Monetary Fund) programme also led to a major loss of confidence with neither development partners nor friendly countries willing to support lackadaisical ownership of agenda for macroeconomic stability and economic recovery.

Copyright Business Recorder, 2023