Challenge of GDP growth

Lacklustre  economic growth and large fiscal and external imbalances (with declining rates of growth also contributing to poor growth in revenues) have made macro-economic management a challenging task.

Still-high inflation — even if it has declined, partly because of controversial methods of its estimation and partly owing to the deferment in administered price increases of electricity, gas and petrol — continued postponement of fundamental structural reforms and an uncertain international environment have also contributed to the macro- economic management challenge.

These outcomes have been discussed in the media by a host of analysts and donors. This article attempts to review the composition of the low 3pc average annual growth in the last four years.

It is revealing that the two principal production sectors of the economy, agriculture and manufacturing, have performed rather poorly, with much of the growth driven by the services sector.

Despite the attractive incentives offered by government in the form of higher support prices (for wheat) and subsidies to inputs (fertiliser) and increased global commodity prices the average annual growth in agriculture was just over 2pc.

Resultantly, its contribution to growth was less than 12pc; and even within this, 83pc of the sector’s contribution came from the sub-sector of livestock, whose growth rate of 4pc per annum in real terms is not based on actual but assumed projections which simply overstate its contribution. The contribution of crops was rather limited.

In the same period the contribution of the manufacturing sector was 20pc, with almost the entire increase coming from the small-scale manufacturing sector. Again, as in the case of the livestock sector, the contribution of small and medium enterprises is not actual but assumed at an annual average of 7.5pc in real terms. This is difficult to defend given:

a) the extent of loadshedding, which affects this sector more because it does not have the financial wherewithal to purchase and maintain its own power supply and remain competitive;

b) this sector does not function in isolation — it buys and sells goods to the formal sector and ought to be affected by the ‘fate’ of the formal sector; and;

c) the extension of the road network which has improved access of the formal sector to local markets which were previously sheltered for local enterprises. The contribution of the large-scale manufacturing sector was more or less flat during this period.

On the other hand, the services sector contributed almost 60pc of this growth — although its contribution is likely to be even higher because a major portion of the sector is undocumented — with almost half of it from expenditure on public administration and defence/security. This includes the increase in the share of ‘community services’ as a result of the deteriorating law and order conditions.

In fact, given the manner in which national accounts are produced, economic growth can be enhanced by simply increasing the budget deficit through overstaffing and salary revisions at a rate higher than inflation, which happened in our case, with more than a doubling of salaries of civil and military personnel over the period.

Moreover, much of this GDP growth has been enabled by consumption, with a rapid fall in the level of investment from 22pc to 12.5pc, with the share in investment of the key job-creating sectors of large-scale manufacturing and transport and communication declining sharply from 45pc to a mere 14pc.

The fact that the government tried to keep fiscal deficit in check, albeit with limited success, through cuts in development spending on infrastructure (especially energy) and much-needed social sector spending is likely to have contributed to the dampening effect on growth.

Owing to energy shortages, there is a fair degree of under-utilised capacity that can stimulate a higher growth rate from the existing stock of machines. However, for pushing up the growth to higher rates, investment in equipment, infrastructure and skills will be required. But easing these key constraints to growth and productivity will take time and such investments also have long gestation periods.

Furthermore, enhancing the growth rate will require resources for investments which in turn require a higher rate of domestic savings to generate these investible resources, because of the continued uncertainty — for a variety of reasons — of non-debt-creating external funds in adequate amounts. In other words, the savings required to maintain high rates of investment will have to come from domestic agents, the government, the corporate sector and households.

Pakistan’s experience suggests that the government will continue to be a ‘dis-saver’ in the foreseeable future, its revenues not enough to meet its annual operational expenditures. Given the nature of our tax base and our taxation systems it would be too much to expect a major breakthrough on the revenue front, while there will be continued heavy demands for defence, loss-making public-sector corporations like PIA, Railways, Steel Mills, etc. and debt-servicing obligations.

It is also difficult to see how household savings can rise astronomically to make up for this shortfall, especially since such savings are in themselves a function of growth and only sustained growth can push up the propensity to save appreciably.

To summarise, domestic savings must increase to finance the investment required for propping up the growth rate since inflows from abroad are not likely to be forthcoming easily, and in any case there are implications of using externally borrowed money.

In view of the constraints described above to raising savings dramatically in the foreseeable future, the average annual rate of growth for the next three to four years, even with a business-friendly government in power, will at best be between 4.5pc and 5pc.

This will be largely through improved capacity utilisation and that too provided some of the electricity/power sector issues are resolved, and notwithstanding the contribution to savings and investments by the informal/black sector not picked up by official statistics.

The writer is a former governor of the State Bank of Pakistan.