The Pakistan Bureau of Statistics (PBS) has just released the estimate of the Gross Domestic Product (GDP) of Pakistan for 2016-17. According to this estimate, the growth rate of the GDP is 5.3%. This is the first time since 2006-07 that the growth rate has exceeded 5%. Finally, it appears that Pakistan has come out of the ''low growth trap'' and the economy should perform even better is coming years.
However, the fundamental question that arises is whether this growth is real or illusory in character. Last year, based on numbers for the first three quarters, PBS had reported a GDP growth rate of 4.7%. This growth rate was disputed by one of the leading think-tanks in the country, the Social Policy and Development Centre (SPDC), and by some independent economists.
Initially, PBS had reported in 2015-16 that there was negative growth rate in the agricultural sector, due particularly to the precipitous 28% decline in cotton output. During the last four decades of Pakistan''s economic history, the experience is that in a year when agriculture performs poorly, with near zero or negative growth, the GDP growth rate does not exceed 4%. This is a reflection of the agricultural linkages with other sectors in Pakistan. Almost 60% of industry is agro-based and over 40% of transportation and domestic trade is in agricultural commodities.
SPDC estimated a substantially lower growth rate of GDP in 2015-16 of 3.1%, as opposed to that by PBS of 4.7%. Apparently, the growth rate of ten sectors, out of the total of eighteen sectors, was overstated by PBS. Now that the full year data for 2015-16 has become available, PBS has revised the growth rate downward somewhat, from 4.7% to 4.5%.
The experience of last year and of estimates in earlier years has necessitated an in-depth examination of PBS numbers of the size of the sectoral and overall GDP in 2016-17. The findings are given below. The research was undertaken by a group of M.Phil / Ph.D students and young economists under the overall guidance of the author.
Stylized Facts on High Economic Growth Since 1979-80, the economy of Pakistan has shown a relatively high annual GDP growth rate of 5 % or above in fifteen out of the 36 years that have elapsed since then. There appears to be a consistent pattern of growth in the high growth years, as follows:
(i) The large-scale manufacturing sector has been the leading sector driving the process of growth in thirteen out of the fifteen years. For example, in the five years of relatively high growth, 2003-04 to 2007-08, the GDP increased an average by 6.5 %. During these years, the growth rate achieved in the large-scale manufacturing sector was consistently higher and averaged 9%.
(ii) In the two years, 1984-85 and 1995-96, when the economy grew at a rate higher than 5%, but with lower growth in large-scale manufacturing, the impetus was provided by agriculture, with bumper crops. The sector achieved double-digit growth rate in these two years.
(iii) In thirteen of the fifteen fast-growth years, there was also faster growth in exports than in the GDP. Part of the dynamism of the manufacturing sector was due to the buoyancy of exports, especially of textiles. (iv) During the fast growth years, electricity generation also increased by almost 5% annually or more in fourteen out of the fifteen years.
Pattern of Growth in 2016-17 The basic question is whether the relatively high growth observed in 2016-17 is consistent with the above-mentioned historical pattern of growth in high growth years. The answer is a NO for the following reasons:
(i) According to PBS, the rate of growth of the large-scale manufacturing sector is 4.9 %. This is lower than the GDP growth rate of 5.3%.
(ii) Rather than show growth of above 5%, exports have actually declined by 2% in the first ten months of 2016-17.
(iii) According to the data of NEPRA, the growth rate of electricity generation is relatively low at 4.5% in the first nine months of 2016-17.
Therefore, either Pakistan has discovered a new way of achieving high growth or there are serious grounds for questioning the growth estimate by PBS for 2016-17.
Performance in Relation to Targets Ambitious targets were set in the Annual Plan and in agreement with the IMF for 2016-17 in order to achieve the target GDP growth rate of 5.7% in 2016-17. The performance of the economy is close to the target, with the GDP growth rate of 5.3%. Have the targets for different indicators also been achieved or nearly achieved in order to ensure the attainment of the growth target? Here again, the answer is a NO for the following reasons:
(i) A key target was to achieve a strong recovery of the cotton crop back to the peak attained in 2014-15 of 14 million bales. This would have implied a growth rate in cotton output of over 40%. Instead, the estimated output is short by over 3 million bales. Results of research are that due its many linkages with the rest of the economy, a one million bales fall in the cotton crop leads to a decline in the GDP growth rate of 0.5% points. This failure alone could have created a divergence from the target GDP growth rate by 1.5% points. The substitution of cotton acreage by sugarcane only partially compensated for this loss.
(ii) Investment was expected to provide a growth stimulus with an increase of 10% in real terms in 2016-17. This was to be achieved especially by higher power sector investments and increased spending on physical infrastructure projects, partly under CPEC.
PBS estimates that investment has increased less in real terms at 8%. One of the reasons for this is the expected lower development spending under the national PSDP by almost 15%. Also, foreign direct investment is less by 38% in relation to the projected level.
(iii) As highlighted earlier, exports were expected to revive in 2016-17. Instead they have declined. Consequently, industrial growth is below target, with near zero growth in textiles.
Here again, based on the above, a large shortfall in relation to the key targets should have negatively impacted more on the GDP growth. As such, for these reasons also, the GDP growth rate in 2016-17 appears to be significantly overstated.
Inconsistencies in Estimation of Sectoral Growth The sectors where the growth rate appears to have been overstated in 2016-17 on the basis of collateral evidence are discussed below. This evidence has been extracted from a large and diverse number of information sources. These include Federal / Provincial documents ,the SBP, Associations/ Councils of different industries, PSEs, International Agencies and data sources and recent financial statements of companies.
Minor Crops: This sector consists of pulses, oilseeds, vegetables, fruits, tobacco, fodder, etc.
The prices of perishable food items have escalated rapidly in 2016-17 by over 13%. This is an indication of big supply shortages. For example, the wholesale price of potatoes has gone up by 89%; of other vegetables by 12%, fresh fruits by 13%; oil seeds by 14% and tobacco by 21%. These increases in prices are substantially higher than the overall rate of inflation in the wholesale price index of 6%. Exports of fruits and vegetables have also fallen by 18% and 17% respectively.
Despite this indication of big failure of a number of minor crops, PBS has shown a marginally positive growth rate of the sector in 2016-17. In fact, in the last nine years, the sector has shown a decline in value added in four years. It remains a much neglected sector.
Livestock: This is a relatively large sector, with a share in the GDP of over 11%. In the absence of a recent Livestock Census it is difficult to get an accurate estimate of the growth in livestock population. However, one important piece of collateral evidence is the growth in consumption of livestock products from the Household Integrated Economic Surveys (HIES) carried out frequently by PBS. The last such survey is of 2015-16.
Milk is the single most important product of the sector, with a share in value of output of over 45 %. Beef and mutton are also major products with a combined share of 24%. According to the HIES, the per capita consumption of these items fell significantly in 2015-16, in relation to the level in 2013-14 by 4 to 13%. This pattern of decline has been observed for the last many years.
PBS reports a growth rate of 3.4 percent in 2016-17. This implies that the per capita consumption of most livestock products is rising. This is contrary to the collateral evidence of a declining trend in per capita consumption of major livestock products.
Manufacturing: The growth rate of this sector at 4.9% has probably been significantly overstated in 2016-17. In the first month of the year it started off with a growth rate of less than 2 %, but by March 2017 it reached 5%. In March alone, apparently a growth rate of 10% was achieved. This buoyancy is in sharp contrast to appeals by Associations of Manufacturers of various industries in crisis, including the APTMA, for government assistance in leading newspapers.
There are two industry groups, viz, textiles and food, beverages and tobacco, where the growth rate appears to have been significantly overstated. These are the largest groups with weights of 30% and 18% percent respectively. In the case of textiles, the collateral evidence points to a decline in the production of cotton cloth. First, domestic availability of cotton yarn for cloth production has decreased, with near zero growth in yarn output and rise in exports of 6%. Also, exports of cotton cloth have fallen by 15%.
In the case of food, beverages and tobacco, the major industries are sugar, cooking oil and cigarettes. There has been exceptional growth in sugar output of over 29% due to a big increase in sugarcane output. But there has been a huge decline in output of the cigarettes industry of over 42 %. This largely neutralizes the growth in sugar output. Also, cooking oil production has risen by only 2%. Therefore, the overall growth rate of 6.9% of the food, beverages and tobacco industry group is very much on the high side. It is closer to 2.5%. As such, in the face of low growth in the two key industry groups, the growth rate of the large- scale manufacturing sector is closer to 3.3%.
Construction: This sector is reported to have achieved a growth rate of 9% in 2016-17, following an even higher growth rate of almost 15% in 2015-16. The performance of this sector is closely linked to the growth in capital formation in housing and infrastructure. Residential and other building construction accounts for over 40% of the value added in the sector. According to PBS, the annual increase of investment in housing is only 4%. The rise in capital formation in physical infrastructure, mostly in the public sector, is also below 9%. Therefore, the growth rate of the construction sector appears to have been overstated.
Wholesale and Retail Trade: With a growth rate of 6.8 percent, this sector has apparently achieved the highest growth rate since 2004-05. This seems highly unlikely. The performance of this sector is closely linked to growth of agricultural and manufacturing output. The combined growth rate of these sectors is reported at a significantly lower rate of 4%. Some impetus may have been provided to trading activity by the jump in imports in 2016-17. But the contribution of imports to the sectoral value added is relatively small, at less than 20%. As such, it is more probable that the growth rate of the wholesale and retail trade sector is closer to 5.5 percent.
Financing and Insurance: This sector has shown the highest growth rate of almost 11 percent among the eighteen sectors of the national economy in 2016-17. This is highly unlikely given the flattening of profits of commercial banks, accounting for bulk of the sector, due to the sharp decline in interest rates and big decrease in investment in PIBs and MTBs.
Community, Social and Personal Services: Like wholesale and retail trade and road transport, this sector is largely a part of the informal economy. No surveys have been undertaken to assess the performance in recent years. However, PBS assumes a relatively high growth rate annually of this sector between 6 and 7%.
The only collateral evidence available on developments in the sector is the change in level of employment, as determined from the Labour Force Surveys carried out by the PBS. The last such survey is for 2014-15.The perhaps surprising finding is that the share of this sector in total national employment has consistently been falling. It was 19% in 2001-02 and significantly less at 14% in2014-15. In fact, employment in this sector has actually fallen from 2012-13 to 2014-15.This is probably due especially to lack of growth in social services. Therefore, unless there has been a remarkable improvement in labour productivity, the sector is highly unlikely to have achieved the high growth rate of near 7% in 2016-17.
The GDP growth rate in 2016-17 Overall, based on the above analysis, PBS appears to have overstated the growth rate of eight sectors in 2016-17. Therefore, our conclusion is that the GDP growth rate in 2016-17 is not 5.3 % but closer to 4.4%. The sectoral growth rates are 2.5% in the case of agriculture, 4% in industry and 5.2% in services. This is also the growth rate achieved in 2011-12 as originally estimated by PBS.
The divergence in the GDP growth rate estimates may be attributable to differences in the underlying methodology and data bases. It may also be the consequence of some pressure from the concerned Ministry on PBS to present a better picture of macro-economic indicators. In particular, the Government may have been keen to show that the economy has finally crossed the threshold growth rate of 5%. It is important that PBS be made an autonomous organisation.
There is need to recognise that the overstatement of the GDP growth rate is not as large as in 2015-16 of 1.4 % points. Hopefully, the economy will finally achieve a GDP growth rate of 5% or more in 2017-18.This will require faster growth of agriculture (especially of cotton output), industry, investment and exports.
We look forward to interaction with PBS in an effort to reconcile the GDP growth rate estimates for 2016-17 to the extent possible.
(The writer is Professor Emeritus and former Federal Minister. Any queries may be addressed to ([email protected].)
Comments
Comments are closed.