The fiscal year, 2024-25, promises to be an eventful year. It will see early negotiations between the Government of Pakistan and the International Monetary Fund for a three-year Extended Facility.
Achievement of the quarterly performance criteria and structural benchmarks will determine the extent and nature of actions to remain in the Program.
There is a need to focus on the Annual Plan prepared every year by the Federal Ministry of Planning, Development and Special Initiatives. This is a properly researched document, which contains a detailed set of economic projections for 2024-25.
The other set of projections are those that were made by the IMF following the second and last review of the Stand-by Facility for Pakistan in May 2024. These projections do not reflect the potential impact in 2024-25 of any new IMF Programme.
This article focuses on the outlook in 2024-25 for economic growth, level of investment and the rate of inflation. A subsequent article will be on the balance of payments and the likely outcome of fiscal operations both by the Federal and provincial governments in 2024-25.
Focusing first on the rate of GDP growth, both the Annual Plan and the IMF projections expect the growth rate to rise from 2.4% in 2023-24 to 3.5%.
The primary source of growth in 2023-24 was the truly exceptional growth in major crops of 16.8%, which was enhanced by the low base due to the loss of output in the floods in 2022-23. Almost 60% of the increase in the GDP in 2023-24 is attributable to the major crop sector.
The expectation now in the Annual Plan is that the level of output of major crops will not be sustained in 2024-25 and there will be a drop in output of 4.5%.
The two sectors that are expected to fuel the process of growth in 2024-25 are large-scale manufacturing and wholesale and retail trade, with growth rates of 3.5% and 4.1%, respectively. However, the performance of the large-scale manufacturing sector will hinge especially on the textile sector, with a share of almost 30% in the overall sectoral value-added.
The export performance will determine the growth of the textile sector. There are two factors here, which could impact negatively on textile exports. The first is the change in taxation of exports brought in the Federal Budget of 2024-25. Now exports will no longer pay only 1% income tax on the value of exports but will be subject henceforth to much higher normal income taxation. This has increased the risk of underreporting of the value and quantum of exports. Further, continued escalation in utility tariffs will reduce the competitiveness of exports. Other industries which may show limited growth in 2024-25 include other agro-based industries and industries relying more on imported inputs.
The increase anticipated in the Annual Plan of a big jump in the growth rate of the largest sector, wholesale and retail trade, from 0.3% in 2023-24 to 4.1% in 2024-25 is also surprising. It is unlikely if the major crop sub-sector shrinks by 4.5% in 2024-25. Almost 25% of the trading activity is in the crops.
Overall, the growth rate of 3.5% in the GDP in 2024-25 looks somewhat ambitious. A perhaps more likely outcome is a growth rate of 3%.
Turning to the overall rate of fixed investment in the economy, the year 2023-24 witnessed the lowest level in the last fifty years. It is estimated at 11.4% of the GDP, with private investment at 8.7% of the GDP and public investment at 2.7% of the GDP. Four decades ago, the peak level of total fixed investment of 17% of the GDP was attained.
The big slump in private investment is attributable to a number of factors. First, interest rates have been at peak levels. The policy rate remained at 22% and was only brought down to 20.5% just before the end of 2023-24. Second, the rupee cost of projects has escalated substantially, especially after the large devaluation of the Rupee in 2022-23 and profitability has been reduced by the weak economy and the cost-push effects of big escalation in electricity and gas tariffs. Third, there has been the ‘crowding out’ effect of colossal borrowing by the Federal government from the banking system.
The overall level of investment in 2024-25 is expected to rise from 11.7% of the GDP to 12.7% of the GDP by the IMF. This will hinge on whether the SBP (State Bank of Pakistan) continues to bring down the policy rate in coming months in light of the lower rate of inflation. Also, the Federal and Provincial governments have generally targeted for an over 50% increase in development spending. If these two outcomes are achieved, then the 1%-point increase in the level of investment looks feasible.
The most discussed projection for 2024-25 is the rate of inflation. The year, 2024-25, closed with an average monthly rate of inflation in the Consumer Price Index of 23.9%. The last few months of 2023-24 witnessed a sharp decline in the rate of inflation, from 28.3% in January to only 12.6% in June.
The two projections for 2024-25 are close to the rate observed in June 2024. The IMF expects it to average 12.7%, while the Annual Plan anticipates the rate to go down even further to 12%.
There are a number of risk elements in the projection of the rate of inflation. First, there is the outlook for imported inflation. The decline in the rate of inflation in the second half of 2023-24 was attributable to the stability in the nominal value of the rupee. Entry into the IMF program may necessitate resort to a market-based exchange rate policy. Already, the IMF projections anticipate an over 15% devaluation of the rupee in 2024-25.
International prices have generally been stable or declined in recent months. However, crude oil prices have shown recently a rising tendency. There is need also to build in the impact of the budgeted increase in the petroleum levy.
Electricity and gas tariffs will probably show a big rising trend in 2024-25 in the presence of the IMF Program and the commitment to prevent any increase in the size of the circular debt. Further, high inflationary expectations are likely to persist.
The rate of inflation projection at 12 to 12.7% appears unduly optimistic. In light of the above stated reasons, the rate of inflation may be in the rage of 16% to 18% in 2024-25.
The likelihood is that in comparison to the Annual Plan and IMF projections for 2024-25, the GDP growth rate may be somewhat lower and the rate of inflation significantly higher this year. Hopefully, the level of investment will rise from its lowest level in fifty years and provide the basis for somewhat higher GDP growth in coming years.
Copyright Business Recorder, 2024
The writer is Professor Emeritus at BNU and former Federal Minister
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