The economy of Pakistan has experienced a sharp slowdown in its GDP growth rate in four out of the last eighteen years. These were the years 2000-01, 2001-02, 2008-09 and 2009-10. The first two years saw a severe drought which badly affected agriculture, leading to near zero and negative 2 percent growth in 2000-01 and 2001-02 respectively. Similarly, the low growth of the economy in 2009-10 was again due to negative growth in agriculture, caused this time by the devastating floods. However, the year 2008-09 was exceptional in nature. The GDP growth rate fell to almost zero percent due to a big fall in output, not in agriculture, but in the large-scale manufacturing, electricity and gas and construction sectors caused by heavy power load shedding and a fall in real development spending.
The country is again witnessing a slowdown in economic activity. This has led the IMF in its World Economic Outlook to project a below 4 percent growth rate of the economy of Pakistan in 2018-19. More recently, the State Bank of Pakistan, in its second quarterly report on the State of the Economy for 2018-19, has projected that the growth rate this year will be close to 3.5 percent. This will represent a big decline in the growth momentum in relation to the previous year when the growth rate was 5.2 percent.
The SBP attributes the likely fall in the GDP growth rate to the various stabilization measures undertaken during the year including the big cut in development spending, hike in interest rates and the quantum devaluation. In addition, major crops have depicted a lackluster performance in the Kharif season. The slowdown in the commodity producing sectors will inevitably impact negatively on the performance of the services sectors.
The objective of this article is to show how deep and widespread this slowdown is likely to be. There is the risk that both the agricultural and industrial sectors will show exceptionally low growth rates and if the overall GDP growth rate is to approach 3.5 percent then the combined growth rates of the services sectors will have to be relatively high at over 5 percent. As such, the GDP growth rate may not be significantly above 3 percent in 2018-19.
Within major crops, first estimates are that the cotton crop was under 11 million bales in the last Kharif season. This represents a decline in output of 7 percent in relation to the previous years' level. Sugarcane production is likely to witness a double-digit fall and rice output has not increased. The Rabi season is seeing a decline in the area sown under wheat. If yields do not increase enough in response to the much higher rainfall, then there is likely to be no growth in wheat output. Overall, the major crop sector may show a decline of almost 2 percent in 2018-19. This is the first time that the sector will show a negative growth rate since 2009-10. One of the major factors contributing to this failure is the big increase in fertilizer prices of over 26 percent.
The performance of other sectors within agriculture is likely to be variable in 2018-19. After a considerable gap of time, there is a visible bumper production of many fruits and vegetables, with the notable exception of tomatoes. This is demonstrated either by a fall or only a minor increase in prices. Also, the volumes of exports of fruits and vegetables have gone up significantly. A growth rate of 5 to 6 percent may be achieved in minor crops.
The level of cotton ginning is likely to be restricted by the size of the crop. Annual estimates of livestock products are approximate in character and PBS in the GDP estimates shows little variation annually around an average growth rate of 3.5 percent. The two smallest sectors, forestry and fishing, will continue to show a low growth rate. Exports of fish have declined by 2 percent in the first eight months of the current year. Overall, the agricultural sector is likely to record a negative growth rate of almost 2 percent in 2018-19.
Turning to the industrial sector, the largest sub-sector is large-scale manufacturing. The year started with a marginally positive growth rate of 0.5 percent in July 2018. It turned negative in August and has stayed negative since then. By January 2019, the cumulative decline in the Quantum Index of Manufacturing has been 2.3 percent. Major industrial groups that have experienced negative growth include textiles; food, beverages and tobacco, pharmaceuticals and chemicals, cement, automobiles and iron and steel. Out of the total of 15 industry groups, there has been a fall in ten groups.
This is perhaps the first time that both agriculture and large-scale manufacturing sectors are likely to end the year with negative growth rates in output. Further, data on monthly power generation from Nepra during the first seven months of 2018-19 reveals a cumulative growth of only 1 percent. The big slowdown is in construction activity. This has resulted from the 30 percent cut in development spending, rise in costs of housing finance and increases in the cost of imported construction inputs. The consumption levels of iron and steel and of cement have gone down by 11 percent and 9 percent respectively in the first seven months of 2018-19. Overall, the industrial sector is likely to show negative growth of between 1 to 2 percent in 2018-19.
The SBP has already highlighted that the sharp downturn in the commodity producing sectors will also impact on growth in the services sectors. The largest service sector is wholesale and retail trade, with a share in the GDP of 19 percent. The trading volumes of domestically produced items are down. In addition, import volumes have also tended to decline following the large depreciation of the rupee. As such, it will not be surprising if this sector also registers a low, perhaps even negative, growth rate in 2018-19.
The transport, storage and communications sector is also a relatively large sector with almost 70 percent of the value added by road transport. There has been a huge decline in the consumption of High Speed diesel, the basic input into transport, of 19 percent in the first seven months of 2018-19. This indicates that unless other transport modes, besides road, show dynamism along with telecommunications, this sector is also likely to show very limited growth.
There are, however, three sectors which could demonstrate, more or less, rapid growth. The banking sector should regain some more buoyancy with the rise in interest rates and larger volume of credit to the private sector. The public administration and defense sector could show a near double-digit growth rate, especially in light of the surge in security expenditures. Private services will continue to exhibit some buoyancy, especially with the 12 percent growth rate in home remittances. Overall, the services sectors of the economy may reach a combined growth rate of 5 to 5.5 percent.
The above analysis reveals that the agricultural and industrial sectors could show negative growth rates of up to 2 percent and 1 percent respectively, while the service sector could achieve a growth rate of up to 5.5 percent. This will imply a GDP growth rate of close to 3 percent. If so, the year will end with the lowest growth rate in the last eight years.
The consequential impact on the process of job creation will be limited. About 800,000 jobs are likely to be created in the face of expansion in the labor force of almost 1.8 million. This will mean a million more unemployed workers and lead to a rise in the unemployment rate from under 6 percent to almost 7.5 percent. Also, the number of poor in the face of the on-going stagflation could increase by 4 million in 2018-19. This is the price that the people are likely to pay for the legacy of a highly unstable and unsustainable economic situation left behind for the new Government which has not yet begun to implement a comprehensive reform agenda. Unfortunately, the worst may not yet be over.
(The writer is Professor Emeritus at BNU and former Federal Minister)
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