Sectoral growth patterns in FY2023-24

The latest Pakistan Economic Survey for 2023-24, released in June, contains a comprehensive set of estimates on the multifarious features of the economy of Pakistan. This potentially makes it possible to conduct cross-checks of various estimates of key economic magnitudes.

The objective of this article is to look at the official estimates by the Pakistan Bureau of Statistics of the GDP growth rate by sector. The GDP growth rate in 2023-24 by sector is estimated at constant basic prices of 2015-16 at 2.38%. There has been a disproportionate contribution by the agricultural sector of almost 61% to the GDP growth. The contribution by services is close to 30%, while that of industry is only 9%.

The bulk of growth in the agriculture sector is due to the phenomenal increase in production of major crops of 16.8%. This is probably the highest growth rate ever. However, it is partly due to the ‘low base effect’ of floods in 2022-23 which led to near zero growth in the major crop sector.

A consistency check of the acreage and production estimates was conducted by comparison with the estimates for Pakistan of each of the major crops by the United States Department of Agriculture (USDA). The USDA estimates are very close to the magnitudes in the PES.

There is need to recognize the extraordinary increase in major crop yields even after controlling for the low base effect. The major spectacular example is that of rice. The yield fell in 2022-23 by 6.6% but rose by 10.3% in 2023-24. Therefore, even after controlling for the low base effect, the increase in yield was 3.7%. Similarly, the corresponding yield increase in other crops was 4.7% in wheat and 5.6% in sugarcane.

What explains the big growth in crop yields? The first reason is the exceptional increase in procurement/support prices of as much as 77% on wheat, 33% on sugarcane and 70% on cotton. There was a strong response by farmers. The fertilizer off-take increased by almost 20% and the credit disbursed to farmers rose by 34%. Clearly, the experience with crop production is a lesson for policies in coming years. It is unfortunate that excessive import of wheat took place, which along with the increase in output has led to a big fall in the wheat price and may lead to less planting of wheat in the forthcoming Rabi season.

We turn next to industrial production in 2023-24. The low growth rate of the sector of 1.21% is attributable to the near zero growth rate of the large-scale manufacturing sector and an almost 11% decline in value added by the electricity, gas and water supply sector.

There is need to examine the lack of growth in the large-scale manufacturing sector during a year when there has been a phenomenal increase in agricultural production. There are strong backward and forward linkages in Pakistan between agriculture and manufacturing. The share of agro-based industries in large-scale manufacturing is close to 40%.

How have the agro-based industries performed? Information is available now for 2023-24. There are some surprising outcomes. Despite the big jump in wheat and rice output, the wheat and rice milling industry has shown a negative growth rate of 1%. Sugar production has increased by only 1.3%. Cotton yarn production is down by 8.1%, presumably because of a big decline in imports. The only good news is the big jump in fertilizer output of 11.6%. Overall, agro-based industry has not performed as well as might have been anticipated.

There are also some surprises with regard to the growth rates of some other sub-sectors within industry. First, the growth rate of small-scale manufacturing is shown at as high as 9% since 2020-21. This is extremely unlikely.

Second, the construction sector is shown as having achieved a healthy growth rate of 5.9% in 2023-24. This is also unlikely, given the decline in use of construction inputs. From July 2023 to June 2024, the production of cement has declined by 4.5%, glass plates and sheets by 7.1% and iron and steel products by 4.4%. As such, it is highly unlikely that construction activity in the country could have risen by almost 6%.

The services sector constitutes 57.7% of the national economy. It has three large sub-sectors, namely, wholesale and retail trade, transport and storage and other private services.

The year, 2023-24, has witnessed considerable variation in the sub-sectoral growth rates within the services sector. The highest growth rate of 10.3% is by education and 6.8% by health. The double-digit growth rate in education is extremely unlikely in the face of little or no increase in the number of teachers and schools in the combined public and private system and a fall in the level of public spending on education as a percentage of the GDP.

The low sub-sectoral growth rates within services are of wholesale and retail trade of only 0.3%, transport and storage of 1.2%, negative 3% in information and communication, negative 9.6% in finance and insurance and another negative 5.4% in public administration and general government.

Here again, it is surprising that no fillip has been provided to wholesale and retail trade by the extraordinary growth of 6.5% in the agricultural sector. It is estimated that over 25% of the value-added in the sector is due to trading of crops, livestock, forestry and fishing products. As such, this should have implied by itself an increase of 1.6% in the value-added in the wholesale and retail trade sector.

The volume of imports has increased by 4.7% in 2013-14, according to the PBS. This should also have contributed another 0.7% to the growth of the wholesale and retail trade sector. Overall, the likely growth rate of this sector is 2.3%, as compared to only 0.3% estimated by the PBS. This alone will add almost 0.4% points to the GDP growth rate.

Overall, there has been a wide divergence in the sectoral and sub-sectoral growth rates within the GDP. There are some sub-sectors where the growth rate in 2023-24 is likely to have been overstated. These are small-scale manufacturing, construction, education and health. However, these are relatively small sub-sectors.

The value-added growth in the wholesale and retail trade is significantly understated by over 2% points. This will add 0.4% points to the GDP growth rate. A similar underestimation may have occurred in the transport sector. The PBS will need to look at these sectors in the process of revising the GDP growth rate estimate of 2023-24.

Copyright Business Recorder, 2024