ISLAMABAD: The country’s Gross Domestic Product (GDP) has posted growth of 0.3 percent, missing all annual targets during CFY 2022-23 due to variety of reasons including lingering political uncertainty, devastating floods, delay in resumption of IMF program and administrative restrictions on imports in the wake of declining foreign exchange reserves.

Finance Minister, Senator Ishaq Dar, who is already facing harsh criticism on worst economic performance, along with his other cabinet colleagues and bureaucracy will share economic performance of FY 2022-23 in the shape of Economic Survey 2022-23 Thursday (June 8).

The incumbent has claimed that economic growth was targeted at 5% for the year 2022-23 amidst the challenges like overhang of Covid-19, supply disruptions because of the Russia-Ukraine conflict and adjustments in current account deficit.

Delay in IMF programme ‘unprecedented’, says Dar

When the present Government assumed office in April 2022, it inherited an economy marred with huge macroeconomic imbalances including highest ever public debt(Rs. 49.2 trillion in June 2022, doubled over June 2018 level), dwindling foreign exchange reserves(S10.8 billion with SBP on April 8, 2022), currency depreciation (10.9% in 2021-22), massive circular debt (Rs. 2.4 trillion in June 2022), high fiscal deficit (7.9% of GIDP in 2021-22) and high current account deficit (4.7% of GDP in 2021-22 with highest imports of $84.5 billion).

The devastating floods of 2022 displaced 33 million people and caused damage and loss worth S 30.10 billion. Lingering political instability, delay in resumption of IMF program and bleak prospects of global growth shattered investors’ confidence.

In the wake of high inflationary pressures, the State Bank of Pakistan had to adopt tight monetary policy throughout the year which also impeded economic activities. Despite these hardships the economy achieved a growth of0.3% which exhibits resilience of the economy.

External sector vulnerabilities inherited from the previous government compelled the present government to take a hard decision of import compression to prevent the hemorrhage of dwindling foreign exchange reserves. Consequently, current account deficit (CAD) decreased by76% and provided much needed space to avert sovereign default.

Economic Performance during 2022-23: The economic fundamentals that pushed the economic growth in 2021-22 were not sustainable and thus the real GDP was projected to shave off some growth momentum and grow by5% in 2022-23 with respective contributions from agriculture (3.9%), industry (5.9%) and services (5.1%).

The growth target was based upon the assumptions of global slowdown and expected abatement of global inflation and stability of exchange rate movements. The growth targets were subject to favorable weather, contained pandemic conditions, managing current account deficit, consistent and supportive economic policies.

Agriculture was badly affected by floods and industrial sector faced double jeopardy as breaks in supply chain of raw materials caused by floods were complemented by import restrictions.

In this situation, the growth was affected especially in the manufacturing sector. Services sector was adversely affected by outcome in the commodity producing sectors.

In this backdrop, the economy witnessed a marginal growth of 0.3% with low growth of 1.5% in agriculture sector, contraction of2.9% in industrial sector and meagre growth of 0.9% in services sector.

Large Scale Manufacturing (LSM) recorded a contraction of 8%during July-March 2022-23 as compared to growth of 10.6% during the corresponding period of last year. Only four groups (wearing apparel, leather products, furniture and football) registered positive growth while the remaining groups including food, beverages, fertilizers, pharmaceuticals, textile and automobiles, etc, contributed to the decline in LSM index.

Mining and quarrying subsector also witnessed a contraction of 4.4% as against the target of 3% due to decline in natural gas, crude oil, other minerals and exploration services. Valued added in small & household manufacturing, slaughtering and electricity generation & gas distribution grew by 9%, 6.3% and 6%, respectively.

On the other hand, construction sector registered a decline of 5.5% which may be attributed to decrease in expenditures by public enterprises and increase in prices of construction material.

The contraction in mining, LSM 4 and construction led to contraction of2.9% in valued added of industrial sector.

Services Sector: The commodity producing sectors during 2022-23 contracted by 0.5 %, therefore, the performance of dependent services sector posted a marginal growth of 0.9% with major contributions from education (10.4 %), human health & social work activities (8.5%), information & communication (6.9%) and other private services (5%). Wholesale and retail trade with major share in services sector posted a contraction 4.5% due lo subdued economic activity and high inflation.

Savings and Investment: Investment-to-GDP ratio decreased from 15.7% in 2021-22 to 13.6 % in 2022-23 with decrease in both public and private investment-to-GDP ratios.

Investment grew by 10.2% in nominal terms, however, decreased by 15.4% in real terms due to high inflation. Both public and private investment increased in nominal and decreased in real terms.

Credit offtake by private businesses decreased to Rs 158 billion during July-April 2022-23 as against Rs 1,108 billion in the corresponding year of last year.

The credit for working capital decreased to Rs.170 billion in 2022-23 as against Rs.576 billion whereas credit for fixed investment decreased to Rs.182 billion against Rs 350 billion in the same period of last year. Manufacturing sector is major contributor towards lower credit offtake in the period.

FBR’s taxes primarily originated from domestic economic activity during July-April 2022-23 with 58.7% share in all net collected taxes. Imports during the period declined by 25.6% and taxes at import stage were down by 7.5% due to administrative restrictions on imports in the wake of declining foreign exchange reserves.

On the other hand, direct taxes were up by 44.2% as taxes collected at domestic level went up by 41.5% on account of growth direct taxes, sales tax and federal excise duty.

Inflation: The main reasons for high inflation are supply chain disruptions caused by catastrophic floods, higher input prices, restraint on imports caused by balance of payments adjustments, and second-round impact of massive currency depreciation.

Domestic energy prices (gas, electricity, and fuel) were increased through reversal of unsustainable fuel and electricity subsidies as part of the stabilization program which also added to inflationary pressures directly and through second-round effects.

Higher transportation costs also added to inflation as petrol prices increased due to a significant increase in petrol base price with the re-introduction of the petroleum levy. Another contributory factor was increase in cost of working capital as a result of continuous increase in domestic interest rates.

Current account deficit improved to S 3.3 billion (1% of GDP) in the first ten months of fiscal year 2022-23 from S13.7 billion (3.6 % of GDP) in the same period last year.

The improvement in the current account balance was mainly driven by a sharp decline in imports. The merchandize trade deficit contracted by around S 10 billion as imports fell more sharply than exports.

Trade balance in services contracted from $ -4.7 billion July-April 2021-22 to $ S -0.4 billion during July-April 2022-23. Exports of services grew marginally from S5.9billion in 10 MFY22 to S 6.0 billion in 10 MFY23, registered growth of 1.5% while Imports of services went down from USS 10.6 billion to S 6.4 billion and registered negative growth of39.7% during period under review.

During July-April 2022-23, 90% increase in export of travel services and around 46% & 49% decrease in import of transport services and financial services respectively, meaningfully contributed towards contraction of trade deficit in services sector.

Exports (fob) fell by 13.6% in the first ten months of 2022-23, remained S 23.2 billion compared to S 26.9 billion in the same period of 2021-22.

The main factors behind this drop were devastating floods that disrupted production and supply chains, removal of Regionally Competitive Energy Tariff for export-oriented industry, low private sector borrowing due to highest-ever policy rate and the challenging global economic environment marked by tighter monetary policies.

The export decline was widespread across all major categories, with petroleum products registering the largest fall of 31.5% (USS 109 million), followed by food items 10.3% (S 449 million) and textiles 6.5% (S 982 million). The decline in export was dominated by price effect.

Copyright Business Recorder, 2023