The Annual Plan of Pakistan has been placed recently on the website of the Planning Commission. This Plan needs to have the permission of the National Economic Council (NEC) to publish it. The meeting of the Council on the 24th of April was disrupted by the walkout of three Chief Ministers and the absence of one Chief Minister. Presumably, the NEC had endorsed the Plan prior to the walkout. If not, then the official validity of the Plan remains in question.
This issue is further complicated by the fact that some key magnitudes have been changed in relation to the draft of the Plan laid before the NEC. For example, the original Plan projected a current account deficit in 2018-19 of $12.5 billion, equivalent to 3.8 percent of the GDP. The present version has revised the deficit upwards to $13.3 billion or 4 percent of the GDP. In addition, the GDP by expenditure estimates for 2018-19 have also been somewhat altered.
Further, there are stark differences in the key parameters of the Annual Plan and the corresponding numbers in the Budget documents brought about by the Ministry of Finance (MOF) for 2018-19. The first divergence relates to the national public development outlay and second to the expected external inflow of financing.
The total outlay in the PSDP for the Federal and four Provincial Governments combined has been set at Rs 1,650 billion for 2018-19 in the Budget-in-Brief brought out by the MOF. The Annual Plan presents a significantly larger size of Rs 2,043 billion for the national PSDP. This includes a provision for the incoming Government, after the elections, of new projects with an allocation of Rs 100 billion. If the Annual Plan figures are accepted as the final estimates of the projected national PSDP, financed through the budgets in 2018-19, then the consolidated budget deficit next year will go up from 4.9 percent to 5.9 percent of the GDP.
Regarding the assumptions about external financing, the estimate of the Annual Plan is $11.6 billion while the Federal Budget for 2018-19 is framed on the assumption of an inflow of $9.5 billion, at the exchange rate of Rs 117 per dollar. The big difference is due the expectation by the Planning Commission of substantially more support from bi-laterals and multi-laterals.
Going beyond the above issues, the Annual Plan is extremely optimistic about the prospects of the economy of Pakistan in 2018-19. The growth rate is expected to exceed 6 percent for the first time after 2004-05 and reach 6.2 percent. As stated in the Foreword to the Plan this will be based on the revival of the agricultural sector; strong performance of industry; pick up in private sector; macroeconomic and political stability; improved security situation and enhanced supply of electricity.
However, this positive assessment stands in contrast to the more dire projections by international agencies. The IMF, for example, does not expect the GDP growth rate of Pakistan to go beyond 4.7 percent in 2018-19, in the presence especially of a large current account deficit which could approach $15 billion or 4.4 percent of the GDP next year, thereby putting further pressure on the depleting foreign exchange reserves of the country. Similarly, the Asian Development Bank Outlook does not expect the Pakistan economy to grow by more than 5.1 percent next year.
Therefore, the basic questions which arise about the 2018-19 Annual Plan are as follows: Are the upbeat expectations about growth justified? Contrary to the concerns of the IMF will the external imbalance decline and the economy stabilize?
Regarding the feasible growth rate, it needs to be stated at the outset that the increase in the GDP in 2017-18 has been overestimated. In the presence of a large water shortage in the Rabi season and reduction in the input of fertilizer of 4 percent it is hardly likely that the growth rate of the agriculture sector will approach 4 percent in 2017-18. Similarly, with a decline in electricity consumption of 2 percent by industry during first nine months of the year, the likelihood of a 6 percent growth in large-scale manufacturing is remote.
Therefore, the high growth rate of 6.2 percent is based on a big jump in relation to that achieved in 2017-18 of probably below 5 percent.
Agriculture is projected to grow by b 3.8 percent in 2018-19. However, water shortages have already emerged in the on-going Kharif season and a bumper crop of over 14 million bales of cotton is beyond the realm of possibility.
The fast growing industries are beginning to suffer a capacity constraint. Investment by the private sector in manufacturing has remained shy. In 2017-18 it is expected to actually fall by 2 percent. As such, continued double-digit growth rates in 2018-19 in industries like sugar, cigarettes, automobiles, cement, iron and steel are unlikely.
Electricity supplies may also continue to be adversely affected by the accumulation of large circular debt in the power sector and the constraints in transmission and distribution. Consequently, despite the commissioning of substantial new generation capacity outages may continue.
Therefore, if achieved, a growth rate of 5 percent or somewhat above in 2018-19 will be considered a good performance. There is need to also recognize that this the election year and there could be some dislocation of economic activity in the first quarter of 2018-19. Hopefully, the new Government soon after its induction into power will implement a strong reform program.
The other extremely good news from the Annual Plan is that Pakistan will probably not need to go the IMF in 2018-19. According to the balance of payments projections in the Plan, there will be a surplus from February 2018 onwards up to the end of 2018-19 and foreign exchange reserves will be back on an upward trajectory.
Accordingly, the plan expects reserves to be at $12.6 billion by end-June 2018 and at $14 billion by end-June 2019, thereby providing import cover of more than two months throughout. The transformational miracle is based on fast growth of exports, only modest growth in imports and recovery in remittances leading to a fall in the current account deficit in the last four months of 2017-18 by 15 percent, compared to the corresponding period of last year. This turnaround is expected in the aftermath of growth in the current account deficit of 50 percent in the first eight months of the current year. Similarly, the deficit is projected to fall by 14 percent in 2018-19 in relation to the likely level this year.
Unfortunately, the Plan projections have already gone awry. As compared to an increase anticipated in reserves after February 2018, reserves have continued to fall, despite large commercial borrowing of $1 billion recently. As of 4th of May 2018, they stand at $11.2 billion. This represents a drop of $1064 million from the level at the end of February, due primarily to continued high growth in imports. The Plan had expected the growth rate to fall to only 2 percent after February for the rest of 2017-18. In March 2018, the growth rate was as high as 13 percent.
Turning to the trade projections for 2018-19, exports are expected to continue showing buoyancy and maintain a high growth rate of over 12 percent. The likelihood of the projections materializing hinges crucially on containment of imports to an increase of only 5 percent, despite a concomitant rise in import demand for machinery and intermediate goods to achieve the target 6.2 percent growth rate.
Oil prices are also on the increasing path and the import bill may be larger by over $2 billion above the normal increase. Consequently, the projected import bill in 2018-19 by The Annual Plan is on the low side at $56.9 billion. It could actually be above $59 billion. This will imply a current account deficit approaching $ 15 to $ 16 billion in 2018-19 as compared to the Plan estimate of $13.7 billion. The former projection is also close to the estimate by IMF for 2018-19.
The Plan also makes optimistic projections about inflows into the financial account of the balance of payments in 2018-19. This includes a 28 percent jump in foreign direct investment and portfolio investment of $4.7 billion, including up to $4 billion of Sukuk/Eurobonds. On top of all this, ‘other’ inflows in 2018-19 are likely to be as much as 66 percent over the bloated projection for 2017-18.
Therefore, the balance of payments projections in the Annual Plan are way outside the realm of possibility. However, we can of course pray that there will be some manna from heaven which will save the Authorities from tough negotiations with the IMF on a Standby facility, including a series of tough prior actions.
A realistic expectation, in the absence of the favorable assumptions made in the Plan, is that reserves will continue to plummet and fall to low levels much below two months of import cover by the end of 2018. In this case, Pakistan will have to approach the IMF soon after induction of the newly elected Government to avoid a severe financial downturn.
Earlier the Eleventh Plan, ending in 2016-17, degenerated into an exercise in wishful thinking. There is the danger that the Annual Plan for 2018-19 may meet a similar fate. Of course, the Planning Commission can justify expectations of better performance with the objective of demanding more from the various stakeholders in the economy.
However, the projections should not exceed the limits of credibility. This can lull decision makers into a false sense of complacency and delay the require policy actions. We had expected more from the seasoned and distinguished Deputy Chairman of the Planning Commission.Anjum Ibrahim, "Annual Plan for 2018-19," Business Recorder. 2018-02-12.
Keywords: Economics , Annual Plan , Feasible growth rate , Lull decision makers , Consolidated budget , Payments projections , Favorable assumptions , GDP , IMF , NEC