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Output: uptick, downtick or …

This is the first of a two-part series focusing on the significant divergence in calculation of Gross Domestic Product by the government and the international donors. And the possibility of attaining the budgeted 3.5 percent growth for the current year.

The budget for the current year, presented by the then Finance Minister, Ishaq Dar, projected a growth rate of 3.5 percent for the current year against a claim of 0.3 percent as per the revised estimates of 2022-23, downgraded by the International Monetary Fund (IMF) to 2.5 percent for the current year (though it may be revised as data is shared with the visiting Fund team for the successful completion of the first staff review of the 3 billion dollar Stand By Arrangement) against negative 0.5 percent last year with World Bank in its latest report projecting a 1.7 percent growth rate against negative 0.6 percent for 2022-23.

There is more than a percentage point discrepancy between the growth estimates for last year as well as in projections for the current year as claimed by Ishaq Dar and the multilaterals that the country is heavily engaged within terms of borrowing. The reason at best could be optimism versus realism or at worst a deliberate attempt to mislead (an assessment based on Dar’s penchant for data manipulation to reflect favourably on his own performance), which is not finding any traction with the multilaterals, evident in the harsh upfront tranche release conditions. Be that as it may the growth rate for 2023-24 may not be as low as forecast by the World Bank though it certainly is not likely to be as high as projected by Dar in the budget.

A growth rate in the negative one year is understandably followed by a high growth rate the next because the base is low. In 2019-20 with the onset of Covid19 by late February 2020 actual growth rate was negative 0.9 percent followed the next year by a growth of 5.8 percent – a rise that reflected higher consumption levels supported by a decline in inventories rather than any sizeable increase in new productive activity. However, what was of considerable surprise to all stakeholders, including the then federal cabinet, was the 6 percent growth rate in 2021-22 which was led by a rise in credit to the private sector – from 594.8 billion rupees July-May 2020-21 to 1443.3 billion rupees in the comparable period of 2022-23, which fueled large scale manufacturing (LSM) growth by 11.7 percent.

In 2022-23 the year the Shahbaz Sharif-led government was in power growth plummeted to negative 0.5 percent. World Bank reported that “Pakistan’s strong post-pandemic recovery came to a halt in FY 2023 with large accumulated economic imbalances that resulted from the delayed withdrawal of accommodative policy, and a series of domestic and external economic shocks. Pressures on domestic prices, external and fiscal balances, the exchange rate, and foreign exchange reserves mounted amid surging world commodity prices, global monetary tightening, recent catastrophic flooding, and domestic political uncertainty. Confidence and economic activity collapsed due to import controls, periodic exchange rate fixing, creditworthiness downgrades, and ballooning interest payments. Poverty is estimated to have increased due to deteriorating wages and job quality, along with high inflation that eroded purchasing power, particularly for the poor.” In short, flawed economic policies as well as the devastating floods were the main factors for the growth tumbling into negative territory.

Today there is an urgent need to allay public concerns over job losses in the private sector due to continuing closure of industrial units (attributable to rising input costs) and a 26.9 percent October inflation rate. Though inflation in October was lower by 4.5 percentage points relative to September yet it is relevant to note that the October rate is calculated on the inflation rate prevalent in September. Consistent above 20 percent inflation since June last year accounts for the recent World Bank projection of poverty in Pakistan at 40 percent.

Monetary Policy Statements (MPS), dated 14 September and 30 October 2023, and the Caretaker Finance Minister are on record to claim an uptick in domestic output. The MPS dated 14 September 2023 noted that “the latest available high-frequency indicators depict some improvement in economic activity. There is a moderate pick-up in sales of key inputs, like POL, fertilizer and cement, along with slight increase in import volumes. At the same time, with better input conditions and latest updates, the MPC noted that the outlook of the agriculture sector has improved. Earlier concerns related to floods have subsided and cotton arrivals almost doubled from last year.” Recent data suggests that in 2022-23 cotton output was only 4.6 million bales while in the current year the estimate is 11.8 million bales.

The 30 October 2023 MPS notes that: “production estimates of major Kharif crops show considerable increase compared to last year…. large-scale manufacturing output has indicated a gradual improvement in the first two months of the year, with major contribution coming from domestic oriented sectors.” The emphasis on domestic oriented sectors is well noted as textile exports, Pakistan’s major value-added export items, have been declining due to rising input costs (high discount rate and energy costs) relative to regional competitors.

The Caretaker Finance Minister stated on 28 October that “local markets have rallied. There is a change, we are getting positive economic data and positive economic sentiments are emerging as well. Agriculture production is gaining momentum. Industrial activity is responding a bit more slowly…but if agricultural output remains like this, our GDP growth is going to be within the range of 2 to 3 percent.”

Farmers, when asked whether the rise in crop output, particularly cotton and rice, is due to higher yield, or higher acreage under cultivation of a particular crop, or better prices in the market (domestic or international), told Business Recorder that subsequent to floods one year the soil is enriched and next year’s crop is usually a bumper crop. If this is indeed the case, then no government can take credit for higher output this year and additionally given that Pakistan is one of the most climatically affected countries in the world the possibility of weather turning the tide against farm output is possible.

Agriculture accounts for 22.9 percent of GDP with crops accounting for only 8.54 percent. LSM accounts for 19.8 percent of GDP (which if it is domestic oriented as noted in the MPS) would not support the balance of payments position or reduce reliance on foreign borrowing.

To conclude, it is hoped that the government focuses on policy changes that support both farm and non-domestic oriented LSM output as well as focus on the largest contributor to GDP – the services sector which at present it is largely domestic oriented but one would hope that with appropriate policy measures like those in place in India, the government can propel the GDP growth rate through this sector.

Anjum Ibrahim, "Output: uptick, downtick or …," Business recorder. 2023-11-06.
Keywords: Economics , Economic growth , Growth rate , Domestic product , Exchange rate , Foreign exchange , GDP growth , India , Pakistan , GDP , LSM , MPs

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