Key fiscal targets missed

Pakistan has missed most of the targets set for the fiscal year 2012-13 including Gross Domestic Product (GDP) growth, savings, investment, revenue collection and services sector with agriculture and manufacturing sector showing mixed trends. According to Economic Survey 2012-13, to be revealed on Tuesday (today) the country's GDP grew by 3.6 percent against the target of 4.3 percent.
The government had fixed GDP growth target at 4.3 percent with sectoral growth of 4 percent, 3.8 percent and 4.6 percent in agriculture, industry and services, respectively. "Acute energy shortages, worsening inter-corporate circular debt, bailouts for loss-making Public Sector Enterprises (PSEs) and regional security environment have plagued growth prospects. Proposed reforms in Framework for Economic Growth (FEG) aimed at improvement in public service delivery and strengthening legal and regulatory framework to foster competition could not be implemented," the document added.
The GDP growth target was consistent with assumptions of slight improvement in energy supplies, normal weather conditions, fiscal adjustments and better investment prospects. Contrarily, complexities in the energy sector further deepened without any substantive corrective measures. Heavy downpour in Southern Punjab and upper Sindh and acute water shortages in early Kharif jeopardised prospects of agriculture growth. Uncertainty surrounding political transition for most part of the year with holding back of consumption and investment decisions by the economic agents impacted on GDP growth prospects in general. The GDP grew by 3.6 percent in 2012-13 against 4.4 percent last year.
The document further said that agriculture sector showed mixed pattern in growth of its components. The crop sector witnessed weak performance as growth in important crops slowed down to 2.3 percent from 7.5 percent of last year. Three out of five crops, ie, wheat, maize and sugarcane posted healthy growth but cotton and rice depicted negative growth.
The performance of other crops comprising major crops such as onion, potato, tomato and fruits, etc, remained good as they grew by 6.7 percent over contraction of 7.7 percent last year. The growth in livestock sector also slowed down to 3.7 percent as against 3.9 per cent of last year. Overall agriculture sector grew by 3.3 percent which is slightly lower than overall growth of 3.5 percent in the last year.
Manufacturing sector growth suffered from power outages and low domestic demand for a few years. Manufacturing sector resisted a growth of 3.5 percent against 2.1 percent last year. In the first four months of current fiscal year, Large Scale Manufacturing (LSM) sector posted sluggish growth. However, subsequent months registered revival. Resultantly, Quantum Index of Manufacturing (QIM) posted a growth of 4.3 percent in July-March 2012-13 against 1.5 percent in the same period last year. Important contributors to this surge in growth are pharmaceutical, petroleum products, sugar and construction related industries. Several policy incentives including lowering of sales tax on tractors from 16 percent to 5 percent, reduction in Federal Excise Duty (FED) on beverages, cement, deep freezers and air-conditioners and encouraging price signals for sugarcane contributed to LSM growth. However, small and medium manufacturing are estimated to grow at a constant annual rate of 8.2 percent.
Services sector witnessed substantial erosion of growth momentum in the year under review as it grew by 3.7 percent which is below the target of 4.5 percent as well as 5.3 percent growth of last year. The main contributors of this erosion of growth momentum are slacking of growth in transport, storage and communications (8.9 per cent to 3.4 per cent), general government services (11.1 per cent to 5.6 per cent) and community, social and personal services (6.3 per cent to 4 per cent). Transport sector performed below expectations because of sluggish performance of ailing rail and air sub-sectors.
The investment to GDP ratio has declined substantially during the last five years from 19.2 per cent in 2007-08 to 14.2 per cent in 2012-13. Both domestic and Foreign Direct Investment (FDI) contributed to the downslide. The fiscal dominance over financing needs crowded out private sector investment. Other contributing factors include peculiar security environment, structural rigidities surrounding governance and regulatory environment. The downward sliding investment has detrimental effects on future productive capacity of the economy and growth prospects. Total investment has decreased to 14.2 per cent of GDP in 2012-13 as against 14.9 per cent of last year. Public sector investment has inched up while private sector is reluctant to invest in this unfavourable investment climate. In addition, non availability of working capital, long spells of power outages, deteriorating law and order situation and other regulatory bottlenecks hampered private and foreign investment.
National Savings inched up to 13.3 percent of GDP from 12.8 percent in 2011-12. Pakistan's reliance on foreign savings has decreased as investment has fallen to converge towards lower savings level. The SBP decision to ease monetary policy by 450 basis points during the last one and half years has not impacted on investment climate which suggests that the problem lies with other determinants of investment.
Government during 2012-13 planned to contain the fiscal deficit through enhancing revenues and controlling current expenditure. Fiscal adjustment was envisaged from 6.6 percent of GDP (excluding 1.9 percent or Rs 391 billion of debt consolidation) in 2012-13 to 4.7 percent of GDP last year. The consolidated total revenue during July-March 2012-13 stood at Rs 2,125 billion as compared to Rs 1,739 billion in the same period of last year, thereby depicting 22.2 percent growth. It constitutes 62.5 percent of the Rs 3401 billion budgeted for 2012-13. The growth in consolidated total revenue has been realised on account of 62.3 percent exceptional growth in non-tax revenue while tax revenues grew by just 11.4 percent.
On the basis of downside risks and keeping in view actual fiscal deficit at 4.4 percent of GDP during July-March 2012-13 and fiscal deficit during 4th quarter averaging 2.6 percent of GDP during 2007-12, it has been assessed that overall fiscal deficit is likely to miss the budget target of 4.7 percent of GDP and is likely to remain in the range of 6.5-7.5 percent of GDP in 2012-13. Moreover, negative financing from external sector, non-realisation of privatisation proceeds worth Rs 74 billion and declining non-bank financing put disproportionate burden on domestic banking source of financing.
The FBR tax collection stood at Rs 1.505 trillion during July-April 2012-13 as compared to Rs 1.426.2 trillion in the same period of last year ie higher by 5.5 percent. This collection constitutes 63.2 percent of the full year budget target of Rs 2,381 billion for 2012-13. FBR's direct and indirect taxes during the period under review have shown growth of 4.7 percent and 6 percent, respectively. The subdued growth in FBR tax collection, during the period under review, could be attributed to considerable slow down in dutiable imports, slow economic activity and frequent changes in the FBR.
Given the real GDP growth and inflation targets, SBP in its Monetary Policy statement in August 2012, projected M2 to grow by 13.1 percent for 2012-13. Based upon sufficient evidence of contraction in demand, SBP took decision for substantial easing of the monetary policy to revive private sector investment and accordingly reduced the policy rate from 12.0 percent to 9.5 percent (250 bps) during current fiscal year: 150 basis points in August 2012 followed by 50 basis points each in October and December 2012.
During July 2012 to May 24, 2013, M2 expanded by Rs 823 billion (10.8 percent increase) as compared to Rs 631 billion (9.4 percent increase) last year. Net Foreign Assets (NFA) contracted by Rs 139 billion and Net Domestic Assets (NDA) of the Banking Sector expanded by 13.5 percent. The increase in NDA has been due to increase in government borrowing from the banking system.
Borrowing for budgetary support from SBP expanded by Rs 312 billion compared to an expansion of Rs 402 billion in the corresponding period of last year. Similarly, borrowing from scheduled banks during this period increased to Rs 776 billion as compared to Rs 645 billion in the comparable period of last year. The major driver of the monetary expansion remained the government borrowing from the banking system. The reserve money expanded by 14.9 percent in this period thereby reflecting significant liquidity injections from the SBP to enable banking sector to buy government paper.
Apart from liquidity implications, the fiscal and external sector developments have resulted in a skewed composition of monetary aggregates. The increase in the NDA component of M2 is disproportionally large compared to contraction in the NFA component. Therefore, despite moderate aggregate demand, pressure on liquidity is likely to continue due to uncertain foreign inflows and substantial financing requirements for the fiscal deficit.
Consumer Price Index (CPI) inflation for 2012-13 was targeted at 9.5 percent but inflation increased by 7.5 percent during July-May 2012-13 as against an increase of 11 percent in the comparable period. The slowdown in inflation was contributed by subdued rise both in food and non-food inflation. The CPI inflation touched lowest ever level in the last nine years at 5.1 percent in May 2013. In view of the current developments, the CPI inflation in the coming months would continue to witness deceleration. Average inflation for the year 2012-13 is likely to be within the range of 7.5-7.8 percent.
Inflation during 2012 remained subdued mainly because of three reasons: (i) enough supplies of essentials; (ii) substantial relief from pass through of imported inflation owing to lower commodity and crude oil prices in the global markets; and (iii) no upward adjustment in administrated prices rather slab adjustment in gas prices for domestic consumers helped keep inflation lower by at least one percentage point in July-May 2012-13.
The government had assumptions of global recovery, better fiscal management, improved energy availability, better business environment, higher crude oil prices and lower CSF reimbursement. With estimated trade deficit at $14.9 billion and remittances at $14 billion, the current account deficit for 2012-13 is estimated at $2.1 billion against a deficit of $4.7 billion in 2011-12.
Trade deficit during the first ten months of this fiscal year narrowed by $326 million, mainly due to contraction of imports with stagnancy in exports. Exports stood at $20.5 billion in July-April 2012-13, almost at last year's level. Imports stood at $33 billion in July-April 201 2-13 which implies contraction of 0.9 percent over last year's level of $33.3 billion. The exports of services are up by 35.1 percent owing to inflow of $1.8 billion reimbursement from Coalition Support Fund (CSF).
Workers' remittances have continuously witnessed an increasing trend during the last few years but this growth in remittances is gradually reaching saturation point. An average growth in remittances over the period of last six years was 19 percent, while remittances reached $11.6 billion during July-April 2012-13 as against $10.9 billion in the corresponding period of last year, thereby showing an increase of only 6.3 percent.