The budget strategy for 2016-17 was approved recently by the Federal Cabinet. Not only is there a positive expectation about the performance of the economy in 2015-16 but also that it will revive strongly in 2016-17 and achieve a growth rate of the GDP of almost 6.5 per cent. This will be the highest growth rate, if achieved, since 2006-07.
The high-level of optimism runs counter to the prevailing reality. The expected GDP growth rate of 5 per cent in 2015-16 is very unlikely. The major crop sector has witnessed a quantum decline of almost 30 per cent in cotton output. Simultaneously, other Kharif crops have shown little growth or even declines. According to the latest official forecast, the wheat crop will be somewhat below last year's level.
Consequently, the agricultural sector, as a whole, is likely to show a minimal growth rate in 2015-16. Given the linkages of this sector with agro-based industry and with trading and other service activities, the overall GDP growth rate is likely to be adversely affected. Historically, over the last three decades, when agriculture has performed poorly during a particular year, the GDP growth rate has not exceeded 4 per cent.
The relatively good performance of the large-scale manufacturing sector in the first eight months of 2015-16 is based on exceptionally high growth rates in a few industries like automobiles, chemicals and fertiliser. However, the big decline in rural purchasing power due to a fall in output and prices, is affecting the demand for a wide range of consumer goods and durables. Industries like cotton cloth, sugar, cigarettes, soaps, matches, tractors, refrigerators, TV sets, sewing machines, bicycles, tyres, paper, etc, have shown either negative or low growth rates.
The big decline in manufactured exports, especially textiles, has also affected growth of the sector. Stocks are being built up in industries like cotton yarn, fertiliser, etc, which will eventually lead to a cut back in output. Electricity generation, estimated by NEPRA, has increased by only 3 per cent in the first nine-months of 2015-16. However, growth is apparently high in the construction sector and cement domestic sales have shown high double-digit growth.
Turning to services, the prospects are for a down turn in growth in relation to 2014-15 in sectors like wholesale and retail trade, transport and communications, banking and public administration. The overall realistic expectation in that the GDP growth rate will range between 3.5 to 4 per cent in 2015-16.
The budget strategy target for 2016-17 of a GDP growth rate of almost 6.5 per cent is highly unlikely for a number of reasons. First, the global economy is showing a lack of buoyancy, with the growth rate likely to fall from over 5 per cent five years ago to about 3 per cent in 2016. World trade is also relatively stagnant and commodity prices are likely to remain very low. Even China may suffer a big decline in its growth rate from over 9 per cent to about 6.5 per cent in 2016.
In the presence of low commodity prices and high costs of production, the agricultural sector of Pakistan is unlikely to show much dynamism in 2016-17. Export growth is also likely to be constrained in the coming year. Therefore, if the economy achieves a growth rate close to 5 per cent in 2016-17, then this can be considered a very good performance.
In fact, the option to stimulate extra growth through counter-cyclical polices in 2016-17is not being actively pursued. The level of the federal PSDP is being increased by Rs 100 billion or 14 per cent, while Provincial PSDPs are also expected to be raised by a similar amount. Overall, the level of development spending as percentage of the GDP is likely to remain, more or less, unchanged. Most of the incremental spending will be on CPEC projects at the Federal level. However, in the short run, CPEC investment will not contribute to higher growth as it will be accompanied by larger machinery imports.
Tax policy will also continue to be focused on incremental resource mobilisation rather than on some tax relief to revive growth in key sectors. FBR revenues are projected at almost Rs 3.6 trillion, implying a high growth rate approaching 20 per cent. Current expenditure, including on defence, is to be restricted to a low single-digit growth rate.
These targets in the budget strategy for 2016-17 imply that the Government is essentially continuing with the process of stabilisation. The fiscal deficit is to be brought down further to 4 per cent of the GDP, close to the target for 2016-17 agreed with the IMF. The patent contradiction is that in the absence of expansionary policies the economy is still expected to achieve a growth rate of almost 6.5 per cent. This is somewhat wishful thinking, perhaps induced by the need to show that political stability must continue as the economy is poised for a takeoff.
Other targets in the budget strategy are also very ambitious. The overall investment level is expected to increase by $13 billion, equivalent to growth of 29 per cent. CPEC investments will contribute, but investments in these projects are unlikely to exceed $6 billion next year. Also, given the state of agriculture private investment in the sector will fall sharply. The unemployment rate currently is above 8 per cent and a big drop in this rate to 4.8 per cent in 2016-17 is also unlikely. However, the inflation rate has been projected more realistically at 6 per cent.
The big area of concern is the increasing fragility of the balance of payments. Exports are falling rapidly and are unlikely to recover strongly in 2016-17. Oil prices have started rising once again. Remittances have stopped growing and non-oil imports have reached significantly higher levels in the presence of an overvalued currency. It is possible that next year the current account deficit could exceed 2 per cent of the GDP.
A build-up of foreign exchange reserves from $20 billion currently to almost $24 billion in 2016-17 will be difficult to achieve in the absence of credit inflows from the IMF. The higher foreign direct investment from China for the CPEC will be used largely to finance higher machinery imports.
Overall, the budget strategy for 2016-17 is based on extremely optimistic assumptions. The Government expects the economy to finally go back to a trajectory of high growth, even in the absence of strong expansionary policies. There is the risk that the GDP growth rate will remain below 5 per cent. The level of unemployment will remain high. Investment could rise because of the CPEC but with little impact on growth in the short run due to higher imports. The likelihood that the economic scenario will change substantially next year is low. We may continue to see `more of the same`.
(The writer is Professor Emeritus and a former federal minister)
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