The Annual Plan

The good news is that the function of Planning and Development at the federal level has been upgraded to the status of a full-fledged ministry by the PML (N) government. For too long, the Planning Commission has languished as a subordinate agency of the Ministry of Finance. The consequence has been far too much emphasis on the short term on the annual budgeting cycle at the expense of a medium to long-run perspective on development.

The appointment of a competent and seasoned technocrat-politician, Ahsan Iqbal, also augurs well for the future of the Planning Ministry/Commission. He has already announced that a long-term development vision and a five-year plan will be prepared to be implemented during the tenure of the present government. However, two things are required. The internal capacity of the Planning Commission has to be substantially augmented. The cadre of professional economists and sector specialists has to be built up once again, including the Chief Economist and Members of the Commission. Second, the process of planning must be opened up more to civil society, private sector, academia, etc. The Commission has to become a hub for intellectual activity and play the role of an effective think-tank.

Already, the benefits of an empowered Planning ministry are visible. Although released somewhat belatedly, the Annual Plan for 2013-14 appears to be more professional and balanced document than was the case in previous years. The earlier Growth Framework of the PPP, despite some good strategic elements, had remained unimplemented and the targets set in the Annual Plans were seldom achieved.

The objective of this article is to analyse the targets in the latest Annual Plan for 2013-14 and to assess their feasibility.

Growth

The target for GDP growth in 2013-14 is 4.4 percent, representing some revival from 3.7 percent last year. Sectoral growth targets are 3.7 percent for agriculture, 4.8 percent for industry and 4.5 percent for services.

The crop output targets are ambitious, at 5.2 percent for wheat, 11.9 percent for rice, 4 percent for sugarcane and 7.6 percent for cotton. Given the underlying limitation of water and sharp rise in prices of fertilisers it is unlikely that all these targets will be achieved.

As opposed to this, the industrial growth target looks conservative. If, in fact, there is a sustained decline in power loadshedding then the process of revival of industrial production may be stronger, with the growth rate approaching 6 percent.

Overall, the GDP growth rate target of 4.4 percent looks attainable, if the availability of electricity and gas improves significantly. If this happens then this will represent the first time after six years that the economy will attain a growth rate above 4 percent.

Investment

A modest increase is envisaged in the rate of investment from 14.2 percent to 15.1 percent of the GDP. If the national PSDP target of Rs 1115 billion is attained in 2013-14, this alone will represent an increase in the public investment rate by 0.5 percent of the GDP.

Private investment may also respond favourably due to the arrival of a business-friendly government, a fall in interest rates and greater access to credit, if the fiscal deficit is brought down sharply.

Savings

Savings are projected to increase from 13.3 percent to 14 percent of the GDP. This is one of the soft spots in the Annual Plan. Home remittances have shown little or no growth during the last few months and the anticipated increase of 7 percent is unlikely. Also, household savings may be adversely affected if the rate of inflation starts rising once again.

Inflation

From 7.5 percent the inflation rate is projected to rise somewhat to 8 percent. Already, in the immediate aftermath of the budget the year-to-year increase in the Consumer Price Index has gone up by 0.8 percent, especially due to the rise in the rate of GST. A number of factors during the year could lead to an upsurge in inflation to a double digit rate in 2013-14. These include the large monetary overhang, the likely escalation in power and gas tariffs, a big jump of 14 percent announced earlier in the procurement price of wheat and higher imported inflation due to faster depreciation of PKR.

Balance of payments

This is perhaps the only area where the Annual Plan may have been overly optimistic. As highlighted earlier, a 7 percent increase in home remittances may not materialise due to significant return migration of workers. The import growth rate of 7 percent may be exceeded if larger furnace oil imports take place for higher electricity generation. In addition, it is assumed that all uncertain flows will actually arrive, including $1120 million from the Coalition Support Fund, $790 million as privatisation proceeds, $1200 million from the auction for 3G licence by PTA, $49 million from flotation of European Bonds, resumption of large scale programme loans by multilaterals of $1100 million and $990 million as a safe deposit from China.

On top of all this, the Annual Plan assumes that a new IMF programme will be in place, with releases of $1.8 billion, reducing thereby the net repayment to the Fund to $1.3 billion in 2013-14. On the 4th of July agreement with the IMF on a three year EFF has been announced. On average this will mean an inflow of $1767 million annually unless releases are front loaded. Despite all these flows, the Annual Plan concludes that Pakistan will still experience a depletion of foreign exchange reserves of $1.3 billion in 2013-14, such that the country will be left with reserves of about $4.7 billion, barely enough to cover one months imports.

Basically, the Planning Commission is conveying the message that even if there is IMF support and all anticipated inflows materialise, the balance of payments position of the country remains fragile and potentially unsustainable. Perhaps, the Annual Plan is implicitly signalling that even in the presence of a new Fund Program there is a need in addition for a Plan B incorporating possibly same draconian adjustments in the latter part of 2013-14.

Overall, the Annual Plan projects that there will be a revival of savings, investment and growth in 2013-14. But it does not fully recognise the risks of an upsurge in the rate of inflation and the likelihood of some further depletion of foreign exchange reserves which could lead to a disruption of the process of investment and growth in the economy and create economic instability.

(The writer is a former Deputy Chairman of Planning Commission)