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The GDP growth rate

The National Income Accounts Committee has endorsed the provisional GDP growth rate estimate by the PBS for 2018-19 at 3.3 percent and also the revised estimate of the growth rate of the economy in 2017-18 at 5.5 percent. The latter is somewhat down from the preliminary estimate for the previous year of 5.7 percent.

There has been a plummeting of the growth rate of the GDP in 2018-19 by over two percentage points. In fact, this is the lowest growth rate of the economy since 2009-10 of 2.6 percent. This year witnessed severe monsoon rainfall followed by the worst floods in the history of Pakistan. There was fortunately no such natural disaster in 2018-19 and yet the economy has performed very poorly.

There is a need to answer some questions. First, which are the sectors that have shown low or even negative growth in 2018-19 and what are the reasons for the deterioration in their performance? Second, are the preliminary estimates an appropriate reflection of underlying trends in different sectors?

The four sectors that have actually witnessed a decline in value added are the crop sector, large-scale manufacturing, construction and mining and quarrying. In fact, for the first time since 2009-10 both the crop sector and large-scale manufacturing have simultaneously experienced negative growth. This demonstrates yet again the strong link between these two sectors. They play an important role in driving the economy.

The consequence is that not only is the GDP growth rate very low but the sectoral pattern of growth is also skewed. Overall, the agricultural and industrial sectors have demonstrated very low growth rates of 0.8 percent and 1.4 percent respectively, leading to combined growth of the commodity producing sectors of only 1.1 percent.

The services component of the economy has performed moderately well with a growth rate of 4.7 percent and contribution to the increase in GDP of as much as 86 percent. Finance and insurance, general government and private services have all shown relatively high growth rates above 5 percent. But the question that arises is how the tertiary sector of the economy can do well when the primary and secondary sectors have performed poorly? This question is taken up later.

The poor performance of the crop sector can be attributed to the jump in the cost of inputs in the absence of a significant rise in output prices. The typical farmer has been squeezed by the big increase in the prices of fertilizers of 28 percent in the case of urea and 11 percent in DAP. This is attributable to the reduction in fertilizer subsidy and the devaluation of the rupee. Also, the prices of LDO and electricity have risen. Poor seed quality and lack of sufficient application of plant protection measures have severely affected, in particular, the cotton crop. Similarly, the harvesting of wheat has been disturbed by untimely rainfall. The PTI Government had announced during the elections that it would declare an agricultural emergency if it assumed power. Instead, the sector remains largely neglected.

The large-scale manufacturing sector has languished, with a negative growth rate for the first time since 2009-10. The fall in output of major crops has clearly impacted adversely on agro-based industries like textiles and sugar. The big disappointment is that despite the hefty devaluation of the rupee and numerous export incentives there has been little improvement in the performance of export-oriented industries, especially in the textile sector. Further, the negative shock to the economy by the big cut in development spending has reduced output in building materials industries, like cement and iron and steel. This also explains the sharp fall in value added in the construction sector of 7.6 percent.

Turning to the reliability of the sectoral estimates of growth, there are sectors where the growth rate has perhaps been overstated and some where it may have been understated. The former sectors are described first below.

Electricity Generation and Distribution and Gas Distribution: There has been much mention about the serious structural problems that the energy sector is facing today. This includes big and rising losses, distribution bottlenecks and the exponential increase in the size of the circular debt. Yet the sector is shown by the PBS as achieving an unprecedented growth in value added of 40.5 percent. This comes as a complete surprise. The PBS will have to explain how such an incredibly high growth rate has been achieved, especially when, according to Nepra, the growth in power generation in the first nine months of 2018-19 is even less than 2 percent.

Wholesale and Retail Trade: This the largest sector in the national economy with a share in the GDP of 18.9 percent. Despite, the extremely low growth in the commodity producing sectors, this sector has shown a growth rate of 3.1 percent. In particular, almost 50 percent of the value added in this sector is due to the trading margin in products of large-scale manufacturing, a sector which has experienced negative growth of 2 percent. Further, trading in imported products ought to have been also adversely affected by the 11 percent decline in the volume of imports in the first nine months of 2018-19.

Transport, Storage and Communication: The growth rate of 3.3 percent in this sector also appears to be somewhat overstated. The principal input into the transport sector is HSD oil, the consumption of which in the first eight months has fallen by as much as 17.6 percent. There has been only a modest increase in consumption of motor spirit of 4.4 percent. Further, the growth rate of the telecommunications sector has tended to slow down following the widespread ownership by now of mobile phones. In fact, the import of mobile phones up to March 2019 is down by 7.4 percent.

Other Private Services: This is also a relatively large sector, with a share in the GDP of 10.6 percent. Apparently, this sector has shown a lot of buoyancy with a high growth rate of 7 percent. But even in good years, the growth of employment in the sector is not more than 3 percent. It is unlikely that a growth rate of 4 percent annually in this sector is being achieved.

There are perhaps two sectors where the growth in 2018-19 may be understated as shown below.

Finance and Insurance: The profitability, especially of the big commercial banks has been rising steadily over the first three quarters of 2018-19. This reflects the sharp increase in interest rates and a big increase in credit to the private sector of 26 percent up to the end of March 2019. It will not be surprising if the sector records a double-digit growth rate in 2018-19 as compared to the 5.1 percent reported by the PBS.

General Government Services: This sector is shown as achieving a growth rate of 8 percent in 2018-19. There are clear indications that current expenditure, excluding debt servicing, is rising rapidly, especially on grants, subsidies and expenditure on defense services. Consequently, the growth in this sector may also exceed 10 percent this year.

Overall, it is likely that the downward adjustment in growth rate of the three sectors – wholesale and retail trade; transport, storage and communications and private services – will be larger than the upward adjustment in the case of finance and insurance and general government services. As such, the growth rate of the GDP may range between 2.6 percent and 3 percent, as compared to the preliminary estimate by the PBS of 3.3 percent for 2018-19.

We await the GDP estimates in the forthcoming Pakistan Economic Survey for 2018-19 at the time of the presentation of the Federal Budget for 2019-20.


Dr Hafiz A Pasha, "The GDP growth rate," Business Recorder. 2019-05-14.
Keywords: Economics , Growth rate , Federal budget , Economic survey , Textile sector , National income , Pakistan , GDP , PBS

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