ISLAMABAD: The government has fixed GDP growth target at 4.3 percent for 2012-13. Current account deficit has been projected at $4.8 billion while the growth of exports and imports will be 4.1 percent and 7.8 percent respectively. According to budget documents, exclusively obtained from Finance Ministry, show a weak macroeconomic environment, political uncertainty and natural disasters impeding economic recovery.
Growth in 2012-13 will largely depend upon recovery in the large-scale manufacturing sector which can capitalise upon its existing idle capacity. Agriculture sector also needs to sustain the existing growth momentum with wheat and rice having great potential. Additionally, adequate resource availability to finance development framework would be critical for growth sustainability.
The documents further disclose that nominal GDP is targeted to grow by 14.2% and GNP per capita is projected at Rs 135,774 billion. The growth is subject to risks like deterioration in energy availability, extreme weather fluctuations, and fiscal profligacy.
The underlying assumption for inflation is 9.5% which is consistent with fiscal prudence and tightening. Lower growth of last four years makes for a harder fiscal adjustment, and higher risks along the way. Pakistan needs structural and fiscal reforms that help in the long run, but do not depress demand in the short-run. A careful articulation to strike a balance between growth objective and fiscal consolidation is very high on the policy agenda. The sectoral review of targets is given in the following paragraphs:
Agriculture Sector: The last year's floods have helped in reaping short-term productivity gains in the agriculture sector which spearheaded the growth in the sector. The sustainability of these gains in the medium-term is challenging and need extraordinary policy efforts.
The agriculture is targeted to grow by 4.(1) percent in 2012-13 on the basis of expected contributions of major crops (3.8%), minor crops (4.5%), livestock (4.2%), fishery (2%) and forestry (2%). The projection for major crops assumes wheat and rice to reach their potential level achieved in the past under normal circumstances, and no significant fall in cotton and sugarcane output.
The underlying assumption for minor crops growth is revival of chilies and oilseeds for convergence to their normal production, and recovery in production of pulses. The moisture content in the air and land owing to heavy showers and floods of last two years will continue to help productivity and yield.
Low productivity and yield in the crop sector and indiscriminate use of fertiliser are impeding factors for growth in the agriculture sector. Substantial yield gaps offer enormous opportunities to increase production through improved soil and water management, use of quality and certified seeds, balanced and optimal use of fertilisers and proper plant protection measures. The improvement in agriculture extension services may also incentives farmers to produce more.
Household Integrated Economic Survey (HIES) 2010-11 shows that people in rural areas depending on income from livestock increased substantially and their share went up from 9.7% to 12.7% during 2007-08 and 2010-11. It implies that livestock sector is growing at a much faster pace in rural economy. The huge price incentive in the sector and growth in livestock products consumption with changing dietary patterns in Pakistan offers bright prospects in the sector.
The gap between consumption and production of livestock products also enhances prospects of this sector in contribution towards growth. The corporate dairy sector may spurt the economic growth, if policy makers are ever able to attract investment in the sector. The growth target of 4.1% for this sector is achievable even in the baseline scenario.
Industrial sector has shown signs of recovery in 2011-12 and could witness a slight increase in growth in 2012-13. The contributions required to grow at the same pace are; mining and quarrying (3%), manufacturing (4.1%), construction (4.5%), and electricity and gas sector (2.2%). The construction sector is likely to get a boost after creation of Urban Challenge Fund and simplification of commercialisation rules.
The government's efforts to consolidate power sector debt and appointment of independent Board of Governors (BoGs) in utility subsidiaries is likely to unclog the system with positive implications for not only value-addition of the utility sector but also help to manufacturing sector as well. The lowering of fiscal deficit implies releasing of funds for the private sector which will be an additional benefit to the manufacturing sector. Tariff rationalisation efforts to give an end to distortions in the economy are other triggers for industry.
Services sector: It was the star performer for the last one decade or so but its growth slid down to 4.0 percent in 2011-12 mainly because of below par growth in transport, storage and communication sub-sector. The services sector is targeted to grow by 4.6% in 2012-13 on the back of contributions from transport, storage & communication (2.5%), wholesale and retail trade (4.1%). And finance and insurance (4.5%). Reforms under NGS are also likely to provide an impetus to services sector in different directions. Telecommunication sector will provide a diversification through auction for 3G licences, thereby brightening prospects for value-addition in the sector.
Savings and Investment: The investment is targeted to improve from current level of 12.5% of GDP to 13.1%. Both public and private investment is likely to contribute in this improvement. Fixed investment will inch up from 10.9% to 11.5% of GDP. Foreign direct investment (FDI) has decreased substantially during the last four years. The peculiar security environment was an impeding factor. With gradual improvement in the security environment, the FDI will improve.
The current downslide is likely to stop in the short-run. The domestic entrepreneurship and innovation are important pillars of Framework for Economic Growth (FEG) and they are likely to boost private investment in the country. With gradual minimisation of role of the government, more room will be available for the private sector under FEG.
Inadequacy of national savings to finance investment has always paved the way to borrow foreigners' savings. National savings are likely to improve slightly from 10.8% of GDP in 2011-12 to 11.2% in 2012-13. The widening external imbalances will adversely affect savings.
Fiscal Development: The government has taken various corrective measures in 2011-12 to rationalise expenditure and broadening of tax base to bring fiscal deficit to a sustainable level. However, unanticipated bailouts to Public Sector Enterprises (PSEs) are still a drain on budgetary outlay. The tax administration reforms are unable to completely eliminate governance issues in resource mobilisation or reducing tax slippages or enforcing compliance.
A more concerted effort is needed on this account. Going forward, Pakistan needs substantial resources to augment its development efforts and improve quality of life. In the post-18th Amendment scenario, onus of fiscal adjustment disproportionate1y fell on the provincial governments and they need to be motivated for adhering to principles of fiscal prudence. The provincial governments may be sensitised to augment their own revenues through prospective candidates like agriculture income tax and property tax.
On the expenditure side, fiscal bailouts to PSEs are no more sustainable and their restructuring became unavoidable. There is need to expedite ongoing restructuring work to make an impact on Budget 2012-13. The procedural improvement is likely to have an impact on efficiency of development expenditure with a focus on completion of existing projects and direct resources to only priority sectors like energy, water, human capital, innovation and technology transfer to lay the foundation for long-term sustainable economic development. Federal financing of provincial schemes needs to be reviewed and at the same time provincial governments should direct their enhanced resources to tie national priority sectors. Fiscal consolidation is needed and is proceeding, but is weighing on growth.
Monetary Developments: Monetary expansion for the year 2012-13 will be determined by emerging domestic and external demand. The outlook for balance of payments is not supportive of considerable improvement in the net foreign assets (NFA) and thus monetary expansion will come from net domestic assets (NDA).
The private sector credit needs to be enhanced from its existing low level to provide support to an investment-driven growth. The government will release more resources for the private sector by lowering its financial needs. The SBP Amendment Act of 2012 also puts restraint on government's borrowing, especially from the SBP. A fiscal adjustment to lower fiscal deficit will help to limit financing needs of the government.
Inflation: The target of Consumer Price Inflation (CPI) is set at 9.5 percent for 2012-13 as against expected average inflation of around 11 percent for 2011-12. The prolonged period of double-digit inflation has serious implications for social and human developments.
The price stability will remain an overarching goal of economic policy making in 2012-13. The considerable improvement in supply of essential items in 2011-12 offers room for optimism in 2012-13. The government's efforts for fiscal stringency, rational monetary policy and vigilance on supply disruptions are some of the underlying assumptions of this inflation forecast.
Balance of payments: Pakistan has a high degree of dependence on oil imports, essential industrial raw materials & machinery and equipment. The current account balance will be maintained at sustainable level by attracting private transfers, especially workers' remittances. The capital and financial account would be strengthened by attracting substantial amount of debt creating and non-debt creating financing.
The recent problem of balance of payments is that of insufficiency of available financing to finance even lower current account deficit. The balance of payments will be kept in a sustainable limit by increasing those sources of external financing that are stable, sustainable and have a positive impact on economic growth, ie Foreign Direct Investment and Remittances.
Trade Account: On account of the energy shortages and security situation, exports (fob) for FY 2012-13 are projected to grow by 4.1 percent to $25.8 billion from $24.8 billion estimated for FY2011-12. Imports during 2012-13 are projected to increase by 7.8 percent to $42.9 billion from $40.2 billion estimated for 2011-12. Hence, the trade account is projected to be in deficit by $17.1 billion in 2012-13.
Current Account Balance: The current account is targeted to be in deficit by $4.8 billion in 2012-13 (1.9 percent of GDP) as against a deficit of $4 billion (1.7 percent of GDP) estimated for 2011-12. Capital and Financial Account: Gross loan disbursements during 2012-13 are expected to remain at the level of $2.7 billion against $2.3 billion estimated for 2011-12.
Overall Balance: Balance of payments will remain under pressure due to external debt repayments including repayments to the IMF, a declining trend of export quantum, rising international oil prices and weak financial inflows. Allowing for other capital inflows, the overall balance is likely to be fractionally in surplus in 2012-13. Gross reserves of SBP are likely to deplete in 2012-13.