The National Economic Council (NEC) is all set to approve today (Wedne-sday) 4 percent GDP growth rate for the next fiscal year, subject to favourable weather conditions, managing current account deficit, consistent economic policies and aligned monetary and fiscal policies. Sources said that working papers prepared by the Ministry of Planning, Development and Reforms stated that GDP growth for the next fiscal year is targeted at 4 percent with contribution from agriculture, 3.5 percent, industry, 2.4 percent, and services, 4.8 percent.
"The growth targets are subject to favourable weather condition, managing current account deficit, consistent economic policies and aligned monetary and fiscal policies" the paper added. The meeting, which will be chaired by Prime Minister Imran Khan and participated by chief ministers of the provinces, has been convened with a seven-point agenda including review of annual plan 2018-19 and consideration of proposed annual plan for 2019-20, draft 12th five years plan (2019-23), review of PSDP, progress report of CDWP and ECNEC from April 1, 2018 to March 31, 2019, and National Social Protection Framework, etc, will discuss causes which led to a decline in growth from 6.2 % to 3.3% for the current fiscal and deliberate on how to manage current account deficit.
The agriculture sector is targeted to grow by 3.5 percent on the basis of expected contributions from important crops (3.5 percent), other crops (3.1 percent), cotton ginned (2.5 percent), livestock (3.6 percent), fishery (4.0 percent) and forestry (2 percent). Better production of Kharif and Rabi cotton crop is expected during 2019-20 given favourable weather conditions and improved input supply. The growth prospects for livestock, fishery and minor crops are also bright.
The industrial sector is expected to grow by 2.4 percent during 2019-20 on the back of better energy supply, better investment climate and consistent policies. The mining & quarrying sector is projected to grow by 2.5 percent, manufacturing sector by 2.8 percent, LSM by 1.7 percent, and construction, electricity generation & distribution and gas distribution by 1.5 percent each.
Services sector is targeted to grow by 4.8 percent in 2019-20, supported by growth of 3.8 percent in wholesale & retail trade, 3.5 percent in transport, storage & communication, 6.5 percent in finance & insurance, 4.0 percent in housing, 5.7 percent in general government services and 7.1 percent in other private services. The expected higher growth in commodity producing sectors will support the targeted growth in services sector.
Fiscal policy during 2019-20 envisages containing fiscal deficit, additional resource mobilisation, controlling current spending and switching to targeted subsidies while prioritising development spending. The concretionary monetary policy is aimed at supporting adjustment process to restore macroeconomic stability and manage aggregate demand. However, the challenge would be to strike a balance between growth and stability in such a way that monetary policy tools may not suffocate economic growth while containing inflationary pressure.
Average inflation is projected at 8.5 percent on the basis of rising commodity prices in the international markets and second round effect of depreciation and base money creation during the current fiscal year. Balance of Payments: Resurgence of global commodity prices in 2019-20 is a positive signal for exporters. Concerted efforts are required to enhance quality of exportable items, diversify product range and look for new markets.
Trade deficit is projected to be 9.2 percent of GDP. With improved investment, environment along with CPEC investments and better performance in industrial sectors exports are expected to gain momentum. Exports for 2019-20 are thus projected to grow by 6.2 percent while imports are projected to increase by 2.1 percent. The current account is projected to be in deficit by 2.8 percent of the GDP. The Ministry of Planning further stated that the year started with highest ever current and fiscal deficits coupled with rising inflation. Structural and macroeconomic imbalances of acute nature could not be sustained for longer period of time and thus an adjustment process that started in December 2017 has started taking its toll in terms of erosion of growth momentum. Given the macroeconomic imbalances in the last two fiscal years 2017 and 2018, the growth slowdown was projected even in January 2018 projections of the IMF, World Bank and ADB. The highly overvalued exchange rate that persisted for three consecutive years has inflicted irreparable damage to the prospects of the economy. The economic growth, the ministry stated, decelerated from 5.5 percent in 2017-18 to 3.3 percent in 2018-19 as two important commodity sectors agriculture and manufacturing witnessed negative growth. Agriculture faced long dry spell during the last almost two years which has serious repercussions for output of the crop sector which continued its poor show. It registered only 0.8 percent growth during the past five years.
The external account adjustment was successful as the current account deficit during the 3rd quarter of 2018-19 has almost been halved as compared to 2nd quarter. However, fiscal deficit adjustment could not achieve desired results owing to massive tax shortfall and rising debt servicing liabilities due to rising interest rates both in internal and external markets as well as 34 percent depreciation during the last 12 months.
The economic performance in current fiscal year was very dismal as envisaged GDP growth of 6.2 percent based upon sectoral growth projections for agriculture, industry and services at 3.8 percent, 7.6 percent and 6.5 percent respectively. The actual growth turned out to be 3.3 percent supported by agriculture (0.85%), industry (1.4%) and services (4.7%).
The growth target was ambitious at the time of its presentation and it became a big task when agriculture sector faced unprecedented water scarcity as water supply was inadequate for Kharif and Rabi crops. The large-scale manufacturing sector has already started deceleration since April 2018 and continued to register negative growth. Construction sector remained victim of shrinking size of the PSDP and non-filer ban. Services sector performance also came under stress owing to spillover of the commodity sector and lower imports.
Debt servicing cost also increased with rupee depreciation with further widening fiscal deficit amid limited sources of revenue generation. These factors, which acted as a drag on overall growth and GDP growth was registered at 3.3 percent in 20 8-19. Agriculture was targeted to grow by 3.8 percent on the basis of expected contributions of important crops (3 percent), other crops (3.5 percent), cotton ginned (8.9 percent), livestock (3.8 percent), fishery (1.8 percent) and forestry (8.5 percent). However, agriculture registered a growth of 0.85 percent, considerably below its target. Major Kharif crops of cotton, rice and sugarcane registered a decline in production whereas wheat crop also barely met its target. Important crops declined by 6.5 percent while other crops registered growth of 1.9 percent. Livestock, forestry and fishery achieved growth of 4 percent, 6.5 percent and 0.3 percent, respectively.
Cotton crop registered a decline of 17.4 percent in its production with 9.86 million bales in 2018-19. This decline came from shortage of irrigation water, use of low quality inputs such as inferior seed and fertilizers at the early stage of the crop, and reduction of 12 percent in sown area. Wheat crop production increased minimally by 0.5 percent compared to the last year due to wheat diseases such as rust and smut, affecting the overall yield per acre of the crop. Production of rice registered a decline of 3.3 percent, whereas production of sugarcane also declined by 19.4 percent giver the last year''s production. The area sown for rice and sugarcane also decreased by 3.1 percent and 17.9 percent respectively.
Industrial sector registered a growth of 1.4 percent during 2018-19 as against the target of 7.6 percent. The growth stayed muted with manufacturing, construction and mining and quarrying, showing a decline in growth with only electricity generational and distribution posting 40.5 percent growth. Large scale manufacturing (LSM) registered a decline of 2.06 percent. Few sub-sectors (such as engineering products, wood products and rubber products) showed positive growth whereas most of the sub-sectors experienced decline in growth.
Mining and quarrying sector posted a decline of 1.9 percent against target of 3.5 percent, while construction sector also declined by 7.6 percent against the target of 10 percent. Overall performance of commodity producing sector slightly grew by 1.1 percent as against 4.4 percent in 2017-18.
Services sector was affected by the decline in commodity producing sectors and registered growth of 4.7 percent. General government services and private sector services contributed to services by surpassing the targets and registering growth of 8 percent and 7 percent respectively. General government services grew by 7.9 percent compared to its target of 7.2 percent. Other private services which include renting of machinery & equipment, education, recreational, cultural and sports activities grew positively at 7 percent against the target of 6.8 percent during 2018-19.
Fiscal deficit is likely to widen further in the year under review primarily because of revenue short-fall and rising expenditure demand. Revenue shortfall is the culmination of demand compression with Rs 70 billion due to lower POL imports plus relief provided in the sales tax by reducing it to 17 percent as compared to the past 25-30 percent. Import compression of other items also cost in terms of foregone revenues of Rs 25 billion. The Supreme Court''s decision to withhold another Rs 40 billion on mobile phones calls also impacted the last government''s tax incentives to taxpayers.
During the first half of the current year, fiscal performance is marked with a substantial rise in the fiscal deficit to 2.7 percent of GDP in July-December 2018 as compared to 2.3 percent during July-December 2017. Consolidated total revenue during July-December 2018 stood at Rs 2,327.1 billion which is 2.4 percent lower than the total revenue of Rs 2384.7 billion collected during the same period of last year. The Federal Board of Revenue (FBR) tax collection was recorded at Rs 2,993 billion during July-April 2018-19 compared to Rs 2923 billion collected in the corresponding period of 2017-18, registering a growth of 2.4 percent.
The policy rate stood at 10.7 percent which implies an increase of 400 basis points since January 2018. Money supply (M2) grew by 3.9 percent (Rs 625.2 billion) during July-April 2018-19 as compared to 4.1 percent (Rs 601.8 billion) during the corresponding period of the last year. Scheduled banks witnessed net contraction of Rs 2,131.7 billion during July-April 2018-19 as compared to retirement of Rs 466 billion in the comparable period of last year. The government borrowing from the SBP increased substantially and stood at Rs 3204.7 billion as compared to Rs 1316 billion last year. Notwithstanding fuelling inflationary expectations, this shift in borrowing from this record borrowing from scheduled banks to SBP may create space for credit to private sector, which expanded by Rs 580 billion during July-April 2018-19 as compared to the expansion of Rs 498 billion last year.
Inflation remained on an upward trajectory during 2018-19. Inflationary pressures initially emanated from non-food side but after December 2018 food inflation became major driver of inflation. Headline inflation averaged at 7 percent for July-April 2018-19 compared to 3.7 percent in July-April 2017-18. The current account deficit for July-March 2018-19 stood at $9.58 billion compared to $ 13.58 billion in July-March 2016-17 indicating some improvement in current account deficit which stood at 4.4 percent of GDP now, compared to 5.7 percent in July March 2017-18. Trade deficit during the first 9 months of 2018-19 stood at $21.3 billion with exports of $18.0 billion and imports of $ 39.3 billion.
During July-March 2018-19, exports decreased by 1.3 percent compared to an increase of 11.9 percent in July-March 2017-18 whereas imports declined by 4.9 percent compared to an increase of 18.8 percent in comparable period of 2017-18. The total liquid foreign exchange reserves stood at $ 15.74 billion on 26th April 2019. Workers'' remittances amounted to $16.0 billion 11 July-March 2018-19 compared with US$ 14.8 billion during same period last year registering an increase of 8.7 percent.
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