Lower GDP growth rate in 2018-19

The economy has been in a state of 'stagflation' for over a year now. The GDP growth rate has fallen while there has been a spurt in the rate of inflation. What is not generally realized is how wide and deep the decline in value added or production is in the different sectors of the economy.

The Pakistan Bureau of Statistics (PBS) has made the preliminary estimate of the GDP growth rate at 3.3 percent in 2018-19. This represents a drop of two percentage points in relation to the final GDP growth estimate of 5.3 percent in 2017-18. However, more recent information reveals that the GDP growth rate in 2018-19 may have been even lower.

The performance of the economy in 2018-19 was very unusual in nature. As many as five sectors showed negative growth, according to PBS estimates. The major crops sector fell by 6.6 percent; cotton ginning by 12.7 percent; mining and quarrying by 2 percent; large-scale manufacturing by 2.1 percent and construction by 7.6 percent. In effect, over 21 percent of the economy experienced negative growth. Combined together this implied a negative 4.3 percent growth rate. The last time such a widespread decline across sectors took place was in 2008-09 when five sectors also showed negative growth and the GDP growth rate plummeted to 1.7 percent only.

The key point to note is that three key sectors, namely, major crops, large-scale manufacturing and construction, have strong backward and forward linkages with the rest of the economy, especially with service activities like wholesale and retail trade, transport and communications and finance and insurance. As such, the growth rate of these sectors is also likely to have been adversely affected.

However, PBS estimates of growth rates in these sectors are on the high side. According to the preliminary estimates, the wholesale and retail trade sector has shown a growth rate above 3 percent; transport and communications also above 3 percent and finance and insurance above 5 percent.

The wholesale and retail trade sector is the largest sector in the national economy, with a share of 18.9 percent. According to the PBS, almost two thirds of the value added in the sector is due to the profit margins arising from trading in goods produced in the large-scale manufacturing sector and in major crops. Imported goods account for about 22 percent of the trading value added, the volume of which also decreased by as much as 16 percent in 2018-19. Unless, there was a phenomenal increase in real trading margins, it is extremely unlikely that the sector could have shown a growth rate of over 3 percent.

The PBS estimates of GDP for 2018-19 are provisional in character. They are mostly based on data available for the first nine months of the year. The annual estimates will be revised and presented subsequently in the Pakistan Economic Survey of 2019-20.

Already, there is evidence of the need for a downward adjustment in growth rates of some sectors. For example, the PBS reports the decline in quantum index of large-scale manufacturing at 2.1 percent in the GDP estimates. By the end of the year it had fallen by 3.6 percent. Similarly, the level of output of the most important crop, wheat, has turned out to be almost 4 percent less than the initial estimate.

There is also one growth rate in the GDP estimates which is well beyond the realm of possibilities. This is the electricity generation and distribution and gas distribution sector. The power sub -sector accounts for almost 80 percent of the value added in the sector. This is a sub-sector which is currently in a quagmire with large and rising volumes of losses and circular debt. Yet the PBS has estimated the growth rate in the sector at an unbelievable 40 percent. During the first nine months of 2018-19, electricity generation has increased by 2 percent, consumption of electricity by 17.5 percent and gas sales by less than 1 percent. With these growth rates the overall sectoral growth is unlikely to have exceeded 10 percent.

The 3 percent growth rate in the transport and communications sector is also problematic. Transport accounts for bulk of value added in the sector. The primary fuel input into road and rail transport is High Speed diesel oil. According to the Oil Companies Advisory Committee (OCAC), the consumption of High Speed Diesel oil has declined by as much as 18 percent in 2018-19. Clearly, the demand for transport was restricted by the decline in output of major crops and manufactured goods and by the fall in the volume of imports. There is even the likelihood that this sector also had a negative growth rate in 2018-29.

Similarly, the growth estimate for the private services sector at over 7 percent is significantly on the high side. With low growth in incomes, it is unlikely that demand for services would be so buoyant. A more likely growth rate is closer to 4.5 percent, based on the historical relationship between the growth of this sector and national income.

Overall, the above adjustments lead to a significant decline in the GDP growth estimate for 2018-19, as shown below:

There is another problem with estimates by sector of the GDP. A constant growth rate is assumed at 8.2 percent in the case of small-scale manufacturing and 4 percent in the case of ownership of dwellings. The former sector is unlikely to have shown such a high growth rate in the presence of a fall in exports by the sector. Exports of sports goods declined by 1 percent; carpets by 6 percent; tanned leather by 13.5 percent and so on.

Therefore, a more realistic GDP growth rate estimate for 2018-19 is 1.9 percent, as compared to the preliminary estimate by the PBS of 3.3 percent. This is the lowest growth rate since 2008-09, when it was at 1.7 percent. Clearly, the growth momentum in the economy has been largely lost. Factors which have contributed to this are the big cut back in development spending, rising costs due to hike in electricity and gas tariffs and in input costs due to the large devaluation of the rupee which led to higher prices and fall in demand. In agriculture one of the major factors was the big failure of the cotton and sugarcane crops in the kharif season.

This article has conveyed the bad news that the GDP growth rate in 2018-19 was not 3.3 percent but significantly lower at 1.9 percent. Hopefully, the PBS will take notice of this downward revision and respond. Also, the time has come for changing the base year for estimation of the GDP at constant prices from 2005-06 to 2015-16 and improving the methodology for estimation of the value added in different sectors of the national economy.

(The writer is Professor Emeritus at BNU and former Federal Minister)