ISLAMABAD: Prime Minister Shehbaz Sharif-led coalition government is to unveil Economic Survey 2023-24 for nine months (July-March) on Tuesday (today), according to which economic performance of the country remained below expectations despite better performance by the agriculture sector, as the contractionary fiscal policy constrained the growth recovery.
According to Survey, fiscal year 2023-24 started with the lagged impacts of economic disruptions which resulted in economic contraction of 0.2% in 2022-23. This contraction was primary culmination of catastrophic floods, surging world commodity prices, global and domestic monetary tightening, and political uncertainty. These factors narrowed the growth prospects for the current year. In this backdrop, overall macroeconomic conditions appeared somewhat improved during 2023-24 as the real economic activities moderately recovered from the contraction in last year.
The real GDP grew by 2.4% during 2023-24 compared to a contraction of 0.2% in 2022-23. The growth was primarily led by agriculture, with significant increase in the production of wheat, cotton and rice, as all touched the highest ever level. The fertility impact of floods and favourable weather conditions complemented by better availability of inputs and policy incentives improved output. This recovery supported some of the agro-based industries which kept decency in manufacturing sector’s growth.
Budget: Rs65.6bn proposed for Suparco
Moreover, withdrawal of import prioritisation measures improved availability of raw materials for industry as reflected in almost slight growth in the large-scale manufacturing (LSM), which stood at 0.1% after showing contraction last year. This was despite muted domestic demand amid tight fiscal and monetary policies and costlier energy.
The constricted import demand, high costs of inputs/ energy and borrowing, and weak domestic demand dampened the growth of industrial and services sectors. Both industrial and services sectors managed to grow by 1.2% each; fiscal consolidation measures managed to post primary fiscal surplus in the first three quarters like last fiscal year. However, the contractionary fiscal policy constrained the growth recovery. Both domestic and foreign investment remained dormant.
The buoyancy in Pakistan Stock Exchange (PSX), with an overall bullish trend in the second half of 2023-24, reflects signs of recovery of investor confidence in anticipation of a relative political stability. The market optimism is partially based on anticipated macroeconomic stabilisation under the new IMF’s Extended Fund Facility (EFF) programme, and the likely SIFC induced flows of investment from Middle East.
On external front, current account deficit continued its downward slide and CAD almost wiped out as the trade deficit further narrowed by US$ 5 billion in the first 10 months (July-April FY24). The upside is that exports posted double digit growth whereas imports contraction continued and remittances complemented the improvement in CAD.
Inflationary pressures persisted at elevated levels in 2023-24, primarily as a result of hike in domestic energy prices. To mitigate the high inflation, the policy rate was maintained at historically high rate of 22% throughout the year. This high policy rate also had severe implications for the fiscal policy as the government had to generate more revenues to finance high fiscal deficit that largely stemmed from high domestic debt servicing.
Economic Survey 2023-24 envisaged a revival of the economy with a growth target of 3.5%, assuming restoration of political stability, external account improvement, macroeconomic stability, and an anticipated fall in global oil and commodity prices. The economic growth achieved is 2.4% as agriculture performed better than the target whereas industrial and services sectors fell short of the targets and posted modest growth.
Agriculture Sector: agriculture sector was envisaged to grow by 3.5% on the assumptions of favourable weather conditions, ample water availability, certified seeds, fertilizers, pesticides, affordable agriculture credit facilities and increased productivity of livestock. During 2023-24, agriculture sector rebounded with a strong growth of 6.3% as against the last year’s growth of 2.3%, with major contributions coming from important crops and cotton ginning. The production of three important crops; i.e., cotton, rice and wheat increased by 108.2%, 34.8% and 11.6%, respectively.
The crops benefited from timely availability of inputs (certified seeds, fertilizers and water), favourable weather conditions and a significant growth in disbursement of farm credit (40% during July-March FY24). The increase in cotton output can also be attributed to better quality of pest resilient seeds and timely announcement of attractive minimum support price before sowing season. Value added in other sub-sectors of agriculture increased with growth in other crops recorded at 0.9%, livestock (3.9%), forestry (3%) and fishing (0.8%). Within other crops, the output of fruits grew by 8.4%, followed by vegetables (5.8%), and pulses (1.5%) whereas considerable decline of 14.4% was recorded in oilseeds production.
Industrial sector was expected to recover in 2023-24 with a targeted growth of 3.4%, contributed by expected growth of 3.2% in LSM. This expected growth was based on improved supply of inputs, anticipated fall in global oil and commodity prices, public sector expenditure and mega projects for infrastructure development.
Industrial sector’s growth during 2023-24 was constrained by continued import management measures, higher costs of energy and raw material, high interest rates and weak domestic demand. Consequently, industrial sector posted a low growth of 1.2% during 2023-24. Large Scale Manufacturing (LSM), which accounts for nearly half of industry, recorded a meagre growth of 0.1% (FISIM adjusted).
Mining and quarrying sub-sector also witnessed a growth of 4.8% against its target of 1.2% due to increase in the production of coal (37.7%), crude oil (1.5%) and other minerals (5.6%). Valued added in small scale manufacturing, slaughtering and construction grew by 9.1%, 6.6% and 5.9%, respectively. Construction expenditure increased by both private sector and public sector enterprises. On the other hand, electricity generation & gas distribution registered a decline of 10.5% because of a decrease in subsidies in real terms.
The commodity producing sectors grew by 4% during 2023-24 and the growth impact was not fully translated into the dependent services sector which posted a lower growth of 1.2%. Wholesale and retail trade, the largest sub-sector with nearly one-third share, grew marginally by 0.3% as the growth impact of agriculture sector was more than offset by slow growth in manufacturing and import compression. Similarly, transport & storage, the second largest sub-sector, grew at 1.2% and this slow pace is attributed to reduced use of air transport, pipeline transport and decline in sales of commercial vehicles and POL sales. However, major positive contributions to this sub-sector were made by railways, water transport and postal services. Other major contributions to the services sector came from education (10.3%), human health & social work activities (6.8%), accommodation & food services activities (4.1%) and other private services (3.6%).
Investment-to-GDP ratio decreased from 14.1% in 2022-23 to 13.1% in 2023-24 with decrease in both public and private investment-to-GDP ratios. Investment grew by 17.6% in nominal terms, however, decreased by 1.7% in real terms due to high inflation.
National savings slightly decreased to 13% of GDP in 2023-24 from its last year’s level of 13.2% mainly because of lower availability of foreign savings. Pakistan’s reliance on external borrowing to finance investment has decreased. The effectiveness of import compression measures is evident from higher level of domestic savings which edged up to 7.3% of GDP from 6.8% of last year.
Federal Budget 2023-24 estimated consolidated fiscal deficit at 6.5% of GDP. During July-March 2023-24, fiscal deficit stood at 3.7% of GDP, almost the same as was during the corresponding period of last year (up by an insignificant 0.01 percentage point). Total revenue grew by 41%. Tax-to-GDP ratio increased marginally from 6.7% to 6.8% and tax revenue in absolute terms grew by 29.3%. Federal taxes continued to remain the major driver with 92.4% share in total tax collection.
Direct taxes increased by 41.4% with their share rising to nearly half of total tax collection. This increase was mainly due to upward revision of income tax rates and higher collections from corporate profits, earnings on bank deposits and investment in government securities. Indirect taxes increased by 21.1% with customs duties, sales tax and federal excise duty posting growth of 15.2%, 17.7% and 64.2%, respectively. Provincial taxes increased by 19.3% largely on account of GST on services. Non-tax revenue registered a better growth of 89.8% on the back of growth of mark-up (PSEs & others) (166.1%), SBP profit (162%), and petroleum levy (98.5%), etc.
Total expenditure grew by 36.6% during July-March 2023-24 mainly due to 33.4% growth in current expenditure as mark-up expenditure recorded a substantial growth of 54%. Servicing of domestic and foreign debts grew by 54.7% and 49.6%, respectively. Within non-mark-up expenditure, subsidies declined by 9.8%. Development expenditure rose by 14.2%, as higher provincial ADPs spending (23.1%) more than offset 7.8% decline in federal PSDP expenditure. Federal deficit declined from 4.2% of GDP to 4.1% while provincial surplus decreased from 0.5% of GDP to 0.4%. Primary surplus improved from 0.6% to 1.5% of GDP.
At the beginning of 2023-24, external sector faced increasing financing gap, high volatility in forex reserves market and tightening of global financial conditions that impacted forex reserves and increased pressures on exchange rate. Subsequently, a crackdown on smuggling of foreign exchange, reforms in exchange companies introduced by the SBP in September 2023, sustained improvement in current account balance and inflows from IMF and other foreign donors alleviated the pressures on FX market and supported exchange rate stabilisation.
Current account deficit substantially narrowed to $ 0.2 billion during Jul-Apr 2023-24, around 94.8% lower compared to $ 3.9 billion in the corresponding period of last year, explained by sizeable reduction in the trade deficit, increase in interest payments and profit/ dividend repatriation. Both a decrease in imports and an increase in exports have helped narrow merchandise trade deficit. The growth of exports was driven by increased production and higher export prices of agricultural and food products.
Copyright Business Recorder, 2024