State of the economy

The fiscal year 2023-24 is likely to close with a mixed performance by the economy. On the positive side, there has been a modest recovery in the GDP growth rate to 2.4%, from negative 0.2% in 2022-23.

Bulk of this growth is from the agricultural sector, which has demonstrated a very strong recovery from the devastation caused by the floods in 2022-23.

The sector has achieved a high growth rate of 6.3% in 2023-24. The major crop sector has performed exceptionally well, with an extraordinarily high growth rate of 16.8%.

The second major area of success has been the successful containment of the current account deficit in the external balance of payments. Over the first eleven months of 2023-24 it is down to only $0.5 billion.

Exports of goods have shown a healthy growth rate of over 11%, while imports have been restricted, resulting thereby in a fall of 2.3%.

The financial account of the balance of payments has turned positive at $4.2 billion, from a negative $1.2 billion in 2022-23. This is primarily due to a bigger net inflow of loans and deposits of $2.6 billion, as compared to a net outflow of $1.5 billion in 2022-23.

Overall, in the first eleven months of 2023-24, there is a balance of payments surplus of $2.4 billion, as compared to a large deficit of $5.3 billion last year.

Coupled with a net inflow from the IMF of $2.2 billion this year, as the net funding under the Stand-by Facility, the foreign exchange reserves have risen to the current level of $9.1 billion. They were only $4.4 billion at the end of 2022-23.

The third area of improvement is the progressive decline in the rate of inflation. It had attained peak on a year-to-year basis in May 2023 at 38.3%. Since then, it has steadily declined to a low of only 11.8% in May 2024. Part of this decline is, of course, due to the ‘high base effect’. In particular, there has been a big fall in the food prices rate of inflation, from as high as 50.7% in May 2023 to a very low rate of below 1% only in May 2024.

Compared to the above three areas of improvement in the economy, there are also some major areas of visible failure. The first is the lack of growth in the large-scale manufacturing sector. It had declined by as much as almost 10% in 2022-23. The on-going year is seeing near zero growth.

Industries which are exhibiting negative growth include textiles, automobiles, electrical goods, cigarettes, cement and iron and steel products. In some cases it is due to restriction on imported inputs and in others because of the fall in investment and construction activity. Generally, consumer demand has remained depressed due to the lack of growth in real household incomes.

The second area of concern is the colossal drop in the level of investment in the economy to the lowest level in the last 50 years at only 11.4% of the GDP. Private investment stands at only 8.7% of the GDP and public investment at only 2.7% of the GDP. Way back in the decade of the 80s, total fixed investment had reached 17% of the GDP.

There has also been a striking change in the composition of private investment. While investment in agriculture continues at a more or less unchanged level, there has been a quantum fall of investment in the manufacturing sector by 55% in relation to the level five years ago.

Instead, the direction of private investment is now towards property and real estate. In 2023-24, this sector will see a level of investment almost two and a half times that in manufacturing. Clearly, this has to be reversed. Private investment in industry and agriculture will need to be at the forefront for export growth and diversification.

The third area of failure relates to the management of the public finances of the country. The year started with a target consolidated budget deficit of 6.5% of the GDP and a primary surplus of 0.4% of the GDP.

The deficit was raised after the agreement with the IMF on the Stand-by Facility to 7.7% of the GDP, with the same primary balance of 0.4% of the GDP. This was due to the projected increase in the cost of debt servicing from Rs 7,303 billion to Rs 8,602 billion, in the presence of the peak policy rate of the SBP of 22%.

The revised estimates indicate that the federal ministry of finance expects a somewhat better outcome of the consolidated budget deficit in 2023-24 of 7.4% of the GDP, as compared to the revised projection of 7.7% of the GDP. However, the primary surplus is anticipated at the same level as the budgeted magnitude of 0.4% of the GDP.

The past experience is that the revised estimates at the time of presentation of the budget understate the actual deficit by the end of the financial year by close to 0.7% to 1% of the GDP. Based on the lower estimate, the budget deficit in 2023-24 is likely to be significantly above 8% of the GDP, with a near zero primary surplus.

We turn now to the trends in two critical indicators in 2023-24, which directly affect the quality of life of the people. These are the level of unemployment and the incidence of poverty.

The last nationwide Labour Force Survey by the Pakistan Bureau of Statistics was in 2020-21. The estimates of the labour force and level of employment were 71.76 million and 67.25 million, respectively. This implied an overall unemployment rate of 6.3% in 2020-21.

The GDP has increased cumulatively by 8.7% since 2020-21. The elasticity of employment with respect to GDP growth is estimated at 0.6. Therefore, the level of employment is likely to have increased by 5.2% and reached 71.2 million in 2023-24.

Meanwhile, the labour force has risen by 1.75 million annually to reach 77 million in 2023-24. Consequently, the number of unemployed has increased from 4.51 million to 6.26 million in only three years. Therefore, the ‘open’ unemployment rate has reached 8.2% currently. If the extent of underemployment is included it has approached 9%.

The lack of increase in real per capita income, rising unemployment and the quantum jump in food prices have led also to a big jump in poverty. The incidence of poverty is estimated at 43% of the population. The World Bank earlier highlighted the magnitude at 40%. Today almost 104 million people in Pakistan are living below the poverty line. Overall, economic conditions have reached a low point in Pakistan, despite improvements in some key areas in 2023-24.

The next article will focus on the outlook for the economy in 2024-25. Will we see a significant rise in the GDP growth rate and a sustained big drop in the rate of inflation? Will the economy move towards greater stability especially in the realm of public finances? Will there be the beginning of a process of decline in poverty and unemployment in Pakistan?

Copyright Business Recorder, 2024