Outlook for growth

Pakistan has moved into a period of uncertainty. On the one hand, there is political instability and the next few months could witness major unfolding events. On the other hand, there is some lack of clarity on the policy posture of the government, for example, on the extent to which the trade policy will be strengthened. A half-hearted attempt was made in the recent ECC meeting.
The ongoing year, 2017-18, is also the election year. During this year, the ruling party may adopt very expansionary monetary and fiscal policies, with a large component of pork barreling. This is what happened in the election years, 2007-08 and 2012-13. Total public expenditure growth during these years was exceptionally high at 36 percent and 24 percent, respectively. Consequently, the fiscal deficit jumped up to above 7 percent of the GDP in both years. Interestingly, foreign exchange reserves plummeted in the two years by 38 percent and 40 percent, respectively. History could repeat itself.
Fortunately, there is one silver lining. The world economy is poised to do somewhat better in 2018 and thereafter. This should improve the prospects of export growth for Pakistan. Also, there is the expectation that CPEC investments, both in infrastructure and in power generation, will gather momentum and favourably impact on the economy down the road.
The Annual Plan for 2017-18 finalized by the National Economic Council (NEC), has set high growth targets. The GDP is projected to grow at 6 percent; with agriculture at 3.5 percent; industry at 7.3 percent and services at 6.4 percent. Exports are expected to rise by 7 percent and total investment to reach 17.2 percent of the GDP, from last year's level of 15.8 percent of the GDP.
More recently, some international agencies have made somewhat more conservative projections. In the recent Asian Development Outlook, ADB expects the GDP growth rate to remain close to 5.5 percent. It projects the current account deficit to continue rising to 4.2 percent of the GDP, in excess of $14 billion. Inflation is likely to remain restricted at close to 4 percent.
The SBP, in its recent Monetary Policy Statement, has courageously retained its optimism on the prospects for growth of the economy in 2017-18. In its summary, SBP states that 'macroeconomic environment remains conducive to growth without impacting headline inflation'. As such, it expects that the GDP growth rate target of 6 percent will be achieved.
The objective of this article is to make an independent assessment of the outlook for 2017-18 for GDP growth. Subsequently articles will focus on the outlook for inflation, public finances and the balance of payments. There is need for some caution as the projection is made on the basis of data available for only the first two to three months. This could change in either direction as the year progresses.
The optimistic forecast of economic growth by the SBP is predicated on favourable estimates of major crops, a healthy growth in credit to the private sector and growing productive imports. Also, the CPEC investments are expected to play a positive role.
However, there may be significant shortfalls in achieving targeted levels of output of major crops. First, the target for area sown under cotton has been missed by 15 percent and there have been reports of some pest attack. Second, there is likely to be a major water shortage of up to 20 percent for the Rabi crops, especially wheat.
Third, sugarcane output has already peaked last year and growers could face a major problem of selling to sugar factories, which are lumbered with stocks of almost two million tons. Fourth, minor crops have shown little growth in the last three years. Prices of onion and tomato have sky rocketed largely due to shortages. Overall, the crop sector is unlikely to show a growth rate in excess of 2.5 percent, as compared to the Annual Plan target of 3.5 percent.
The large-scale manufacturing sector has made a promising start in 2017-18, with a first month growth rate of almost 13 percent. Industries like food, beverages and tobacco, automobiles and engineering goods have achieved very high double-digit growth rates. This is partly due to a 'low base' effect as growth in July 2016 in these industries was negative. Cement production may not show the same buoyant performance as in the first month with a big decline subsequently in the growth rate of local dispatches and a large fall in exports.
The crucial factor in determining the growth of the large-scale manufacturing sector will be performance of the textile industry, with the largest share of 30 percent in manufacturing value-added. In turn, this will depend on the export performance. A big decline has been witnessed in the first two months of 18 percent in quantity exported of cotton cloth and some increase in cotton yarn of 5 percent.
A major risk factor will be the performance of the sugar industry, which showed a record growth rate of 38 percent in 2016-17. If it is unable to largely export the surplus output, then production may fall sharply in 2017-18, thereby affecting the overall growth in manufacturing. There are also a number of industries which have been hit by cheap imports. This includes petroleum refining, chemicals, fertilizer and electronics.
The prospects for the construction sector depend on the extent of jump in development spending and real estate activity. The electricity and gas sector may show a relatively big expansion with the likely increase in power generation following the commissioning of new plants later this year.
Overall, there is a fairly high likelihood that the industrial sector will achieve a growth rate of almost 6 percent. If this happens, it will be the first time such a high growth rate has been achieved since 2007-08.
The services sector's growth will depend to some extent on the performance of the commodity producing sectors. At this stage, the expectation is that the more buoyant sectors will be wholesale and retail trade, especially if imports grow rapidly, and public services, due to election-related spending.
Services which may not perform strongly, include the financial sector, due to low profitability caused by the low interest rates, ownership of dwellings and private services. A realistic forecast is for the growth rate of the services sector to be close to 5.5 percent.
Given the likely growth rates of the sectors, the GDP growth rate could reach 5 percent in 2017-18. Last year PBS overstated the GDP growth rate at 5.3 percent. It was actually closer to 4.4 percent.
There are a number of major risk factors including larger crop failure, buildup of higher inventories, jump in oil prices, problems with enhancing power generation due to liquidity constraints, displacement of economic activities due to some political turmoil, possible financial difficulties due to drawdown of reserves in the latter part of 2017-18 and so on. These factors could push the GDP growth rate in 2017-18 down to below 5 percent.
(The writer is Professor Emeritus and former Federal Minister)